Saving for retirement is not easy, and many U.S. employees struggle to save enough. According to Aon Hewitt, here are five things employers can do to positively impact the financial security of employees:
1. Automatically enroll workers at a higher savings rate. To increase employee savings, companies should default employees at a higher initial savings rate, preferably at or above the employer-matching threshold. Also, adding features such as automatic contribution escalation to 10 percent of pay or more would help gradually increase savings rates to sufficient levels, ultimately aiding employees in meeting their long-term needs.
2. Take steps to minimize retirement savings leakage. Educating employees on the risks and long-term impact of withdrawing, taking loans, and cashing out savings can help limit the risk of leakage, or taking funds out of the retirement savings prematurely. In addition, employers can work together to make the 401(k) rollover process easier for employees, which will reduce the likelihood of cash-outs upon job termination — a significant problem.
3. Use your scale. Plan sponsors have an opportunity to immediately improve investment returns by reducing fees that come out of participant accounts. Investment management fees comprise the majority of fees in savings plans. Sponsors should evaluate using institutional fund vehicles, such as collective trusts where available, and ensure where they are not available that the least expensive share classes are utilized. In addition, consider innovative approaches that can leverage those lower fees, such as custom target date funds.
4. Know who is giving advice to your employees. When employers provide access to participants by any third parties, the employee needs to understand the information and guidance that will be provided. Companies should ask their providers to quantify the revenue generated from the services they are providing so both the employee and employer can evaluate any conflicts and understand how the third party is compensated. Employers also should be sure to ask how employees will be made aware of any associated fees.
5. Provide help. Employees can always benefit from more and improved education on retirement and financial readiness. Companies should ensure that employees have access to the right information about how much they need to save for retirement, their investment options, and plan details. This could include guidance, advice, and/or managed accounts, in addition to educational materials, and should consider the spend-down phase as well as the accumulation phase. Using multiple channels is crucial so that employees have options across self-service vehicles, such as online information, phone, or in-person support.