A client of mine recently celebrated the retirement of Joe - a 25-year employee - with a nice party. Three months later, Joe was back at the door, begging for part-time work. Why? All these years he hadn't put enough money away for retirement and he needed help. What could my client do? What would you do?
A survey conducted last year by personal finance site GoBankingRates found that 56 percent of Americans had only $10,000 put away for retirement and a whopping one in three have nothing saved at all. Some reports highlight the fact that the millennial generation -who represent 50 percent of the U.S. workforce - are also not putting away nearly enough what they need for retirement. But it's not just a millennial issue. The GoBankingRates study also found that only one in four people over the age of 55 have more than $300K saved for their retirement.
Americans aren't saving enough for their retirement, plain and simple and it's their employers - you and me - who are partly responsible.
A big part of the reason is that over the past few decades the emphasis on corporate employee benefits have shifted from retirement (particularly defined benefit plans, which are now mostly extinct in the private sector) to healthcare. But we're making other mistakes. Here are five of them.
1 - We don't offer retirement plans.
The typical defined contribution 401(K) plan costs about $500-$1,000 to setup and around a hundred bucks a month, on average, to administer every year. It's really not a lot - particularly when you look at the long-term return on investment for these plans. Yet why don't 37 percent of employers provide a simple 401(K)? It's a mystery. Once a plan is setup not only can employees save their pre-tax dollars but the more your employees save the more you can put away pre-tax - subject to the IRS' discrimination testing. Not only that, but having a 401(K) plan makes you more competitive than the other businesses that don't offer any at all and on the same level as companies that do. By the way - the 2017 Tax Reform bill now includes a three-year, $500 annual credit for employers with less than 100 employees who start a 401(K) plan - that's enough to take care of those setup fees, right? We all need to offer these plans.
2 - We don't educate our people enough.
401(K) plans aren't easy to understand, no matter how "simple" a provider tries to make it. Employees need to figure out the right percentage to withhold. Employers need to calculate how much to match. Some people have a mistrust of these plans, financial institutions and any other so-called "scheme" that may involve taking away their cash. Others aren't really sure how to allocate their assets and how to evaluate the risk of their investment choices. The tax impacts are hazy to some and so are our options for withdrawing and taking loans. So what are we, as employers, doing? Not enough! We need to be providing more educational sessions, more written material, better communication and more support around these plans so that our employees can be more comfortable. We should lean on our benefit providers to be more proactive. Remember - the more our people save, the better it is for them...and for us.
3 - We don't do enough to encourage participation.
Even for those companies that have 401(K) plans, fifty-one percent of their employees are not actively contributing to them, financial advisors Edward Jones found in a survey. Why? Education, as noted above, is one big factor. But we could also be doing more. We can offer better matching programs - these are tax deductions folks! We can make it a point to, instead of giving out cash, instead contribute bonuses (or a higher bonus) directly into the accounts of those employees who participate in our retirement plans. We can frequently communicate the benefits of these plans to our people during company meetings and events. All of these things will not only raise awareness but will increase our employees' comfort level...which will turn into more participation.
4 - We don't offer other savings plans.
The 401(K) is not the only game in town. There are some great after-tax savings plans that we could offer. For example, a Roth IRA plan is one where eligible employees can put after-tax money away and then it grows tax free. A 529 plan takes after-tax contributions and lets them grow tax free as long as the money is used for either higher education or (thanks to recent tax reform) private school tuition. Many companies who have high deductible health plans are still not coupling them with Health Savings Accounts - a form of 401(K) for your healthcare, where both the employer and employee can contribute pre-tax dollars to be used for healthcare related expenses and some of these amounts even roll over to the next year. It's possible that your company can offer some or all of these options but of course it depends on your structure and your employees. At the very least, make available a financial advisor who can discuss these options with everyone to figure out what's best.
5 - We're not hiring as many full timers.
This is something I'm very guilty of. Over the years and as I've tried to keep my overhead under control it's become more common to hire subcontractors and part-timers to do specific tasks, rather than full time employees. Are you doing the same? It's good for the bottom line and some of these people prefer the arrangement. Unfortunately, they're not able to participate in our benefit plans and I do nothing to ensure that they're putting money away somewhere else (an IRA? A SEP?) for their own retirement.
The bottom line is that People are saving less for retirement. That's a fact.
You can point to a lot of reasons why this is happening: stagnant salaries, the high cost of housing (particularly in larger cities where many of the jobs are), a consumer/spending culture, oppressive student and credit card debt, double digit increases in health care costs, astronomical expenses for education. But there's another big reason why people aren't saving for their golden years: employers - like myself - are not doing enough to help them.
See our Best Retirment Plans for Business.