Will Your Employees Have Enough to Retire?

A 2013 Natixis Global Asset Management survey confirms that American investors are confident about their financial prospects. However, they may be underestimating their retirement income needs. What can plan sponsors do to help their employees? Let’s take a look at the survey numbers and then review some action steps.

Survey Says

According to the survey, Americans project that they’ll need 62% of their final preretirement salary to live in retirement, compared to the 70% to 80% income replacement rate commonly used for planning purposes. On average, American investors expect to retire at age 64 and live to age 81. Two-thirds of Generation X and Y investors believe they’ll retire before age 66, but only 51% of the baby boomers believe the same.

Most investors admit to their lack of investment knowledge. Among U.S. investors, 54% say they don’t have a financial plan to help them reach their goals, and 45% say they don’t have clear financial goals. Investors admit that they spend more time planning home improvements (48%) and vacations (47%), online shopping or researching big purchases (42%), and responding to or posting on social media (25%) than planning for retirement.

The survey indicates that investors are willing to use new strategies, including alternative investments. A majority of the investors surveyed don’t believe that traditional equities/bond portfolio allocation is the best way to manage investments and grow their portfolio.

Fear of the Unknown

The survey shows that 40% of Americans perceive long-term care costs that aren’t covered by insurance as the biggest threat to their retirement security. Americans expect to need five years of long-term care, on average. Baby boomers are more likely to consider uninsured long-term care costs a threat to a secure retirement (48%) than are younger investors (32% of Generation Y investors surveyed).

Other factors that investors believe could threaten their retirement security include:

  • Suffering a significant reduction in retirement savings or investments because of market conditions,
  • Being unemployed,
  • Having insufficient proceeds from defined contribution, pension or other benefit plans,
  • Being physically incapable of working, and
  • The cost of college education for children.

The survey concludes that, while most investors say they strive for a balance between risk and return when making investment decisions, 65% admit they can’t always decide between pursuing return and preserving capital. However, 73% of investors would choose safety over performance.

How to Help

The U.S. Department of Labor’s fiduciary regulations impose an implied duty on plan sponsors to promote the financial literacy of the plan’s average participant, and to educate participants on how they may save and invest through their plan. If plan sponsors offer participant guidance in the form of “safe harbor” nonfiduciary education, the plan sponsor is protected against any potential fiduciary liability that might arise from such participant guidance.

Consider implementing the following best practices to promote your employees’ retirement readiness:

Evaluate participants’ retirement readiness. Plan sponsors can evaluate the retirement readiness of plan participants by reviewing the plan’s overall participation rate, median contribution rate and median account balance. Identify the plan’s popular investment alternatives and discuss them with participants.

Develop a communication strategy. Highlight the urgency of preparing for retirement and conveying a “call to action.” Hire a qualified provider to implement a retirement readiness education program to supplement your communication strategy. Conduct education sessions on an ongoing basis to reinforce the importance of staying on track with retirement goals.

Motivate your participants. Stress the importance of getting started with retirement planning. A good way to get participants to take immediate action is to provide a realistic assessment of each participant’s level of retirement readiness. Many financial advisors and plan administrators offer Internet calculators and Web tools designed to help plan participants evaluate whether they’re on track to a successful and financially secure retirement.

Make plan changes. Adopt plan design changes to promote retirement readiness. Certain elements of a plan’s design can heavily influence a plan’s participation rate, how much participants contribute and how they invest their accounts. Consider adopting automatic enrollment and escalation, a default investment alternative, and a lower percentage match.

Get Your Participants Retirement-Ready

The Natixis survey offers some sobering statistics. By implementing the best practices discussed, plan sponsors can help their participants become “retirement ready” and help them toward financial independence.

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