Are Your Employees Ready For Retirement?

Study after study shows that many American workers are either not saving at all or not saving enough for retirement.  To combat this issue, some people have suggested the United States implement a mandatory retirement system similar to the one in place in Australia.  In 1992, Australia passed a law that requires employers to divert 3% of most workers’ salary into retirement accounts.  There are reports that indicate that about 90% of the workforce in Australia has a retirement savings account. This is vastly different from the United States where it has been reported that less than half of the workforce participate in an employer-sponsored retirement plan.  And even those who are participating are not contributing anywhere close to the 10 to 15% of pay that is recommended by most financial advisors.  Many United States workers rely on the prospect of social security benefit.  However, given that social security only covers approximately 30% of the income needed at retirement and the high probability that many young people of today will be lucky to get any social security benefit when they retire, it is clear that most Americans will not be prepared for retirement.

Unfortunately, until the day when retirement savings become mandatory in the U.S., the burden really falls on employers to make sure their employees are saving for retirement.  Employers need to encourage their employees to participate in the employer-sponsored retirement plans by educating them about the benefits of saving for retirement.  This can be achieved through group education meetings with a retirement plan consultant, or individual financial planning sessions with a Certified Financial Planner.  Financial planners are beneficial because they assist participants with selection of the proper asset allocations, and they ensure participants are on course to meet their individual retirement goals.

In addition to education, employers can also make changes to their plan document that will increase employee participation.  For example, employers should consider adding automatic enrollment to their plans.  An automatic enrollment feature allows the plan sponsor to automatically enroll all eligible participants into the plan unless they choose to opt out.  Participants must be given notice of the automatic enrollment feature, the opportunity to opt out or change their contribution level, and information on where their automatic contributions are invested.  Studies show that automatic enrollment increases participation because employees are less likely to opt out.  This increase in participation also means more non-highly compensated employees will be participating in the plan, thereby helping the plan pass non-discrimination testing.

Many 403(b) plan sponsors have also added a mandatory contribution feature that requires all participants to contribute a certain percentage to the plan.  A mandatory contribution provision can require all participants to contribute 5% of their pay once they reach age 30 or after completion of 1 year of service.  The mandatory contribution is treated as an employer contribution, and does not count towards the participant’s elective deferral limit.

For aging employees, plan sponsors can also increase the amount these participants are contributing by informing them of the age 50 catch-up contribution.  Specifically, the IRS allows participants who are or will attain age 50 during the calendar year to contribute up to $5,500 for 2013.  The age 50 catch-up contribution is in addition to the employee contribution limit of $17,500 for 2013.  Thus, an employee who is age 50 or over may contribute up to $23,000 for 2013.

Finally, there is evidence that employers can incentivize participants to contribute more by re-designing their match formula.  A research study by Principal Financial Group revealed that a method called stretched matching can go a long way towards increasing employee deferrals.[1]  Here is how stretched matching works.  Assume an employer’s operating budget only allows for a 2% match, but the employer wants to increase employee contributions without increasing the employer match.  Instead of a formula that calls for a match of 100% up to 2% of pay, the employer can re-design the match formula by offering 25% up to 8% of pay.  Although the employer match under both formulas remains at 2%, the study showed that participants had an average contribution, before the match, of 5.3% with the first formula and an average contribution of 7% with the second formula.  According to the study, the higher target deferral in the second formula resulted in an increase in participant contribution.

The bottom line is your employees are your biggest assets.  You should show them how much you value them by implementing a few of these strategies to ensure that they are ready for retirement!

Founded in the 1950s, Carroll Consultants, Ltd. has experienced professionals with a wealth of knowledge about retirement plans. If you have any questions about this article or our services, please contact Marcie Carroll, at, or (610) 225-1210.

This material is not intended to provide specific legal or other professional advice.