Decreasing average tenure in segments of the U.S. workforce is impacting more than company productivity—it also impacts the success of employer-sponsored retirement plans.
A recent Employee Benefit Research Institute (EBRI) brief examined employee tenure among American workers, finding that in the past 35 years, the median tenure for workers of all wages and salaries, ages 25 or older, has remained at five years. However, for men ages 25 to 64, the median tenure stood at 10.2 years in 2018—a stark drop from the 15.3 years measured in 1983 but not as low as the 9.5 years measured in 2006. Women in the same age group held a median tenure of 4.9 years in 2018, a slight decline from 5.0 years in 2016.
While there are some positive interpretations for shorter tenures associated with a low unemployment rate, the EBRI report warns that there are also clear negative consequences of a shorter median tenure when it comes to the financial health of employees. Among these is the fact that lower levels of employee tenure may reduce the percentage of the working population that is eligible for or contributing to a defined contribution (DC) plan at any given time. In addition, even when shorter-tenure employees join a DC plan, they may face vesting periods and they may need to draw on retirement assets to meet emergency savings needs.
A 2018 Investment Company Institute (ICI) study, conducted in collaboration with EBRI, looked at average account balances and compared “consistent” participants with those participants that had at some point paused (and potentially restarted) their contributions. The study reported that for “consistent” participants, the median account balance was three-times the median across all participants.
Neal Ringquist, executive vice president and chief sales officer at Retirement Clearinghouse, suggests figures like this underscore how employee tenure can impact retirement plan performance. While automatic enrollment provisions popularized since the Pension Protect Act (PPA) have improved the retirement system overall, it is still very common for workers to stop saving for retirement when they leave one job for another.
“When a worker has greater tenure, the individual tends to not demonstrate destructive savings behaviors, such as cashing out, stopping contributes, and so forth,” Ringquist says. “When an individual does change jobs, the retirement system tends to drive some decisions that are destructive to their preparation for retirement and so forth, such as cashing out and delaying retirement.”
Plan Sponsors Can Help
Experts agree sponsors can make progressive plan design changes to ensure new workers are joining retirement plans and are reaping the benefits sooner rather than later when it comes to things like matching contributions. As two examples, implementing immediate eligibility and automatically enrolling participants to the plan can drive great plan performance, says Spencer Williams, founder, president and CEO at Retirement Clearinghouse. He says most plans still offer eligibility only after six months to a year of employment.
Something else to consider is that, even if a new employee is automatically enrolled into a retirement plan, this doesn’t mean he will be defaulted at the same savings level he may have been using at a previous job. Craig Copeland, senior research associate with EBRI and the author of the tenure study, suggests plan sponsors may want to consider automatically enrolling participants at their prior contribution rate.
“If you go from a plan with auto-enrollment and auto-escalation, and you’ve escalated up for the past years, now that you started a new job, are you going to go back to the typical 3%?,” he asks. “If there were a way to auto-enroll people at the rate they used in a previous plan, assuming this is higher than the default percentage of the new plan, this would potentially help people stay on that track.”
Joe Connell, partner at Sikich Retirement Plan Services, says this type of capability, while appealing, would also be hard to put into practice. Instead, he suggests employers can use onboarding questionnaires to get new employees thinking about the right level of retirement savings.
“It’s going to be hard to automate that process because you can’t auto-enroll at different rates for everybody,” Connell says. “But, you can ask as part of the onboarding process and help an employee opt in to where they want to be, versus the auto-enrollment rate that you’re going to give them.”
The Role of Auto-Portability
Aside from considering these design features, plan sponsors may want to look into auto-portability solutions as well, says Copeland, in particular to minimize cash out behavior. Rather than transferring their retirement plan balance to a new company, an action that comes with complexities unfamiliar to participants, workers often find themselves cashing out their retirement savings and paying the hefty penalty tax that comes with doing so. Auto-portability solutions, though, automate this transfer process by finding the new employer’s plan and transferring the balance for participants, essentially leaving no complicated work for the participants to navigate.
“Auto-portability will play an increasingly important role because it helps with balance preservation,” Copeland says. “It automatically gets that money into your next employer’s plan, and it makes that jump from one employer’s plan to the next so much easier. It’s a cumbersome process to do it on your own.”
Ringquist and Williams agree with this notion. They note how creating a plan design which encourages roll-ins, not just from other plans but also from individual retirement accounts (IRAs), will decrease cash outs.
“If we make it easy, we preserve it, and if we make your savings experience continuous, we’ve actually created synthetic tenure,” Williams concludes. “It’s not real tenure, but you get the same outcome from the retirement plan perspective. That’s the exciting principle behind auto-portability.”