Data & Research March 12, 2013

Targeting Generational Issues in Retirement Education

Beyond the general education about how to much to save and how to invest, retirement plan participants have issues at different life stages that need to be addressed.
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There are many issues that are not “one size fits all,” and can differ by generation, says Rich Rausser, senior vice president of Client Services at Pentegra Retirement Services.  

Rausser told PLANADVISER he thinks Baby Boomers (born 1946 to 1964) think about retirement very differently from other generations since they are closer to it. Thinking shifts from ‘How much should I save?’ to ‘Do I have enough?’, he explained. More complex issues come into play, such as timing of distributions, tax planning, when to take Social Security and whether to take one source of income at a time or blend income sources.   

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Rausser suggested plan sponsors focus on educating Baby Boomers about distribution options and strategies. Plan sponsors should make sure participants understand the distribution options for their retirement plans. But, beyond the form of payment, Baby Boomers need education about how to time distributions and tax planning. Plan sponsors can use plan advisers, providers or other experts to deliver this education.  

According to Rausser, Generation X (born 1965 to 1976) are in their peak earning years, but they have other financial obligations tugging at them, so they face tough choices about saving for retirement. Some still have young families and are looking to buy a house; others are saving for or getting ready to pay for children’s college expenses. Many are concerned they are jeopardizing their long-term retirement success by not accumulating savings for themselves.  

Rauser said one of the best things a plan sponsor can do for Generation X is a gap analysis—comparing their income replacement needs with how their current savings will cover that income. This will show them if saving at their current rate is enough, but many will find out the gap is wider than they think, Rausser contended. To fill the gap, they can either reset their expectations of retirement, increase contributions to retirement plans or change to more aggressive investments. Always tell the Generation X group to pay themselves first, Rasser said, because their biggest risk is putting other needs ahead of retirement needs.

 

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For Generation Y (born 1977 to 1990), there are choices to make between needs and desires, which can have significant consequences for the future. Rausser pointed out that many are making real money for the first time and may want to splurge on things they want, but many are also on their own for the first time and face student loan debt or the need to purchase a car in addition to regular household bills. According to Rausser, even if they are saving, it is not enough. Often Generation Y sets aside 5% to 6% of income early, but lets it ride, he explained. Retirement savings should be evaluated annually; assuming salaries increase throughout a career, maintaining a 6% contribution over a 40-year span creates a shortfall.   

For Millennials (born 1991 and later) retirement is not a priority at this point; they may have a hard time imaging that far down the road. If they start saving from day one, it will be easier to do so as their careers develop, becoming a habit, Rausser contended. And, they will come to appreciate that habit when they see how much their savings has accrued.  

For both these generations, the advice to pay yourself first is also important. But, this is where automatic plan features, such as automatic enrollment and automatic escalation come in, Rausser said. He suggested plan sponsors use these features to help the younger generations of participants.  

Illustrations of how savings accumulates over time are also helpful. One tool Pentegra uses shows participants how a person who started saving early, even if that person stopped contributing after 10 years, accumulates more savings than a person who starts saving 10 years later and continues. “The very first dollar you put into savings is the most valuable in terms of long-term compounding,” Rausser noted. If their retirement plan offers a company-match contribution, plan sponsors should also stress to participants how they are leaving free money on the table by not contributing, he added.  

Rausser concluded that for all age groups, plan sponsors should be educating participants about the cons of taking a plan loan or hardship distribution if it is not a real necessity. Participants could be jeopardizing their ability to have a successful retirement if they take their savings out of the plan.

 

 

Data & Research March 12, 2013

Engaged Participants Also Need Help

When it comes to retirement planning communication, plan sponsors must remember to lend a helping hand to disengaged and engaged employees alike.
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It is equally as important for employers to place emphasis on communicating with employees enrolled in the retirement savings plan as it is to engage non-active and new employees, according to Manning & Napier’s white paper, “Increased Savings: The Best Risk Management Tool in the Retirement Readiness Equation.”

Participants that proactively enroll in their employer’s retirement savings plan likely recognize the importance of saving, and engaging with currently enrolled employees allows employers the opportunity to pass along valuable information to help motivate participants to potentially increase their savings rates, the paper said.

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But it’s easy for participants to delay increasing their savings rates in order to tend to what they consider more urgent responsibilities, such as paying for housing, food and student loans. These types of financial pressures have been a mainstay in participants’ lives and are likely a major reason why average contribution rates to defined contribution plans have remained low, ranging from 4.2% to 5.6%, among non-highly compensated participants over the past 20 years, the paper said.

Plan sponsors should target different age groups instead of using a blanket communication tactic, Mary Moglia-Cannon, JD, senior analyst and portfolio strategist at Manning & Napier, toldPLANADVISER. In addition, plan sponsors may want to consider basing communication around life events—for instance, a young employee might be getting married or buying his first home, whereas a middle-aged employee may be paying for a child’s college tuition. (See “Targeting Generational Issues in Retirement Education.”)

“We think plan sponsors are thinking about [communicating with employees] more than they ever have,” Moglia-Cannon said.

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When it comes to communicating with engaged participants, plan sponsors can also:

  • Promote the use of voluntary automatic escalation features to combat savings rates that have not been increased over the years. Even highly engaged participants may set their initial contribution rate and fail to revisit the decision often enough as the demands of daily life get in the way, the white paper said. Features that make it easier for participants to automatically increase contribution rates whenever they receive salary raises or bonuses can have similar effects on savings rates.
  • Alter employee match provisions to encourage higher savings rates. Participants commonly contribute only the minimum amount necessary to receive the full employer matching contribution. Because the employer match is a key motivator for participants to contribute to a retirement savings plan, employers should consider stretching the match to a higher percentage of pay. For example, the typical match of $0.50 per $1 up to 6% could be restructured to $0.25 per $1 up to 12% of a participant’s salary, at no additional cost to the employer. It’s becoming increasingly common to restructure the match, Moglia-Cannon said.
  • Provide employees with helpful tools and tips. Arming participants with tools that help them better understand whether or not they are on the path to retirement success can be useful in changing participant behavior and improving retirement outcomes, the white paper said.
  • Provide holistic assessments of participants’ financial wellness. Plan sponsors are recognizing that participants need help with overall financial planning, not just guidance with their 401(k) account, the paper said. Plan sponsors should consider offering employees a broad range of educational products and services—from the introduction of basic finance-related concepts to help them make better decisions in the future, such as the importance of maintaining a good credit rating, to more personalized solutions such as insurance and estate planning.

More information about the white paper is available here.

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