If you are reading this and employed, you likely participate in an employer-sponsored retirement plan (401(k), 403(b), 457, etc.). Even though most corporations offer healthcare benefits and retirement plans, many think corporations don't care about their employees' financial wellness.
Is that true?
Some would say most companies offer employee benefits to compete with other companies for employees. I'm sure that's true. Employee benefits are a significant factor in choosing an employer. That's especially true for healthcare. Employers provide and often subsidize healthcare for their employees.
The absence of pensions plans in most companies' employer-sponsored retirement plans (a.k.a., defined contribution plans) is the replacement. Defined contribution plans shift the responsibility for retirement from the employer (pensions) to the employee. Employees are now responsible for funding and investing for their retirement.
Determining how much to save and how to invest are largely up to plan participants (you and me) now. One complaint frequently voiced is the lack of information and training available on in these plans.
Is that still the case? Are companies changing the way they offer education to plan participants? Do companies not care about our financial wellness and our need to have a comfortable retirement?
New research published by Alight, a firm that provides health, wealth, and HR solutions provides evidence that has changed.
I'll review some of the findings in their report and offer my thoughts on its conclusions.
How to Know if Your Employer Cares about Your Financial Wellness
The title of the report is 2019 Hot Topics in Retirement and Financial Wellbeing. Alight has produced this report annually for the last fifteen years. On this fifteenth anniversary, they looked back at responses to their questions throughout the years compared to current responses. They were curious to see if anything had changed. In their words, “very much has changed.”
They looked back in five-year increments, comparing 2005, 2009, and 2014 to now. The companies interviewed are among the largest companies in the corporate space. They had 171 respondents representing 7.6 million employees. The average number of employees was 44,500. The median was 17,000. Below is a chart of the percentage in employee size groups.
As you can see, 70% of the respondents had 10,000 employees or more. At 38%, those companies with over 25,000 employees make up the largest percentage.
Why does this matter? In reality, it probably doesn't.
Comparisons over the years
2005 to today
In 2005, employers had concerns over safe-harbor rules for rollovers. Safe-harbor rules require employers to provide specific information about 401(k) rollover options to employees who leave their companies. In 2005, those rules Employers were concerned about protecting themselves from legal problems for not following proper rules.
Today, those rules are clear. The report shows employers are now more concerned with keeping the plan participants money in the plan rather than rolling it over. The report says that for every employer who prefers terminated participants rollover their plans, six others want them to stay in the plan.
In 2005, target communications focused on making sure people appreciated their retirement plan benefit.
Today, the report says “communications are less about appreciation and more about action.” They go on to say that in 2019, 11% of employers plan to send targeted communications about the impact of loans on retirement, up from 5% in 2018. The message seems to be that participants now appreciate their plans but need educating on how best to use them; about the things detrimental to their retirement, like loans.
2009 to today
In 2009, plan sponsors looked at adding more plan features like automatic enrollment, automatic escalation (increasing the contribution % each year), and investment rebalancing.
Today, most of the larger plans have these three things. The focus now is on determining the best Qualified Default Investment Alternative (QDIA). If you don't select investment options yourself, the company chooses one for you via the QDIA. In the past, the QDIA was cash. Lawsuits resulted saying that cash did not keep pace with inflation and shouldn't be the default. Now, QDIAs are target date or lifestyle funds.
The typical target date fund bases its allocation on the participant's age and the year in which they want to retire. Companies are now pressuring providers to include more participant characteristics besides age. In the last financial crisis, many people discovered their target-date funds were not as conservative near retirement as they expected. Some had to delay retirement.
In 2009, four out of five employers had at least some participants in their defined benefit plans. Due to changes in the law and increased premiums for the PBGA, the government agency that guarantees pensions, many companies have frozen their pension plans.
2014 to today
In 2014, companies began adding financial benefits beyond retirement plans. Communications focused on helping employees and plan participants save more.
Today, according to the report, financial wellness (or wellbeing) programs and initiatives are becoming more entrenched in employer benefits programs. The report shows a significant increase from 30% to 65%. When asked what's most important, employers said that employees' financial wellbeing and retirement readiness were the most important things.
This year's themes
Looking ahead to what employers say they will focus on in the coming year, the study identifies three trends:
- Financial wellbeing programs will continue to expand – Efforts cited include helping employees pay off student loans (though only at 17% currently), teaching the basics of financial markets (50%), budgeting (44%), health care education (39%), financial planning (38%), debt management (32%), prioritizing savings (1%), and saving for specific life stages (25%). All of these areas represent an increase over 2018 from 3% to 10%.
- Employers will focus on having their participants keep their money in their company plans – As mentioned, that includes dissuading participants from borrowing against their retirement plans. Many employers have added or are considering adding more income options to their plans.
- Most employers are trying to locate missing participants – It's remarkable how many employees leave their companies without doing anything with their 401(k) plans. Employers make efforts to find them to help them get their money. This can be especially costly when a participant reaches age 70 1/2 and has to begin required minimum distributions (RMDs).
The four stages of financial wellbeing
Alight believes there are four stages people move through to achieve financial wellness (wellbeing) to become financially independent. They are security, foundation, growth, and freedom. The following chart shows the percentages the surveyed companies say they are most focused on.
Over half of the respondents stay focused on savings goals and understanding investments and insurance. Understanding income, expenses, and managing debt are the next highest area.
Broader wellness programs
Many employers view financial wellbeing as part of a larger wellbeing strategy. Over two years ago, more than a quarter of employers had no plans to create or implement a broader approach. Two-thirds of employers report that their wellness programs now include help to improve physical, social, and emotional health. Whatever their reasons, those are good changes.
Many employers today have high deductible healthcare (HDHC) plans. Over 80% of those offering HDHCs, emphasize the long-term savings aspects of them. Three-quarters of respondents said they highlight both the short-term and long-term elements of HSAs.
Since 2017, 20% of employers created and offer early retirement packages for workers. Over the last two years, 18% of employers had a voluntary early retirement program for employees. Some 80% of those offering them reported enhancing their programs with better severance and health benefits.
Lifetime income options
Lifetime income options can have a significant impact on improving employees' retirement. Some things they are doing include online modeling tools (76%) plan distribution options, a form of automatic payment from the plan (57%) professional management with a drawdown (distribution/income) feature (18%) annuity options within the plan (11%) help purchasing annuities outside the plan (9%) and offering qualified longevity annuity contracts (QLACs) (1%).
QLACs are a newer option that allows participants to place up to $130,000 in 2019 (up from $125,000 in 2018) into a deferred annuity that converts into a guaranteed income at a predetermined date in the future. As the statistic shows, companies have been slower to adopt the QLAC.
Not surprisingly, companies are fearful of being sued over their defined contribution plans. Over 60% of employers say the threat of lawsuits hampers their innovation. There have been several lawsuits in the past few years where employees accused employers of violating their fiduciary standard (mandated by ERISA) in the management of their 401(k) plans. Many of the lawsuits centered around the fees charged to the plan. Those include higher investment fund fees and fees paid to plan record keepers.
Revenue sharing also came under fire. Revenue sharing is when mutual fund companies, who are often the record keeper, increase the fees charged on the funds to offset administrative costs of running the plan. In essence, they pass on those costs to the participants in the form of higher fund fees. There have been successful suits filed by employees on fees.
The retirement planning landscape has changed dramatically over the past few decades. We've gone from a system where employers funded and guaranteed retirement income for their employees in the form of defined benefit pension plans. The costs and risks of these plans are incredibly high. Many of the existing plans are underfunded. That means that there isn't enough money in the plans to pay the promised retirement benefits.
The shift to defined contributions plans is mostly complete. Less than 10% of private companies offer pension plans today. Federal, state and local governments are the largest provider of these plans. Many of them are severely underfunded and headed for disaster if not changed.
That leaves us in charge of funding and managing our retirements. One of the major complaints, as stated earlier, about retirement plans is the lack of education, investment options, and planning tools available. Most employees are woefully unprepared and lack the necessary knowledge to determine what's needed to fund their retirement.
I'm encouraged by the changes highlighted in the Alight report. It seems companies are becoming more concerned about the short and long-term financial wellness of their employees. That is a welcome and much-needed change.
Competition demands change. If companies lose employees to other companies because of benefits, they will adapt to compete. The report seems to confirm changes are happening. One can argue the reasons for these changes. It seems inarguable, however, that change is taking place. Of course, not all employers take this approach.
The report focuses on larger employers. It does not represent the tremendous number of small businesses who employ millions of workers. Many of them offer excellent benefits as a way to hire and keep good people. Others cannot afford to do so.
The ire toward corporations is mostly at these larger companies. Some have earned their bad reputation and the ire it brings. It's nice to see a study like the Hot Topics in Retirement and Financial Wellbeing report bring the data to support the many positive changes made by companies over the last fifteen years.
Here's to hoping the next fifteen years brings even more positive changes.
Now it's your turn. Does your company offer financial wellness programs? Do they offer education on investing and planning? I welcome your thoughts and comments.
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