Plan Sponsors Want Participants to Improve Retirement Income Planning

Education regarding financial wellness can include reminders of what to keep in mind for the future.

Many retirement plan participants have approached retirement income planning informally, and workers need additional help to prepare for retirement.

Data from Principal Retirement and Income Solutions Retirement Security Survey examined employers’ views of workers retirement income planning to better understand what employees are doing and how their retirement income planning could be improved. The data shows that 8% of employers say employees have done a poor job in determining a target age for retirement; 11% say employees are not reviewing estimated Social Security benefits well, and 13% indicate employees have done a poor job of calculating what amount of savings they need to retire.

Employers said retirement plan participants were poor at creating a formal retirement income plan (29%), meeting with a financial adviser regarding retirement savings and income planning (23%), and reviewing their expected health care costs in retirement (33%).  

“What this effectively tells you is it seems to be fairly informal,” says Sri Reddy, senior vice president for retirement and income solutions at Principal Financial Group.

“We know that as Americans get older and they get near the retirement zone many do go investigate their Social Security earnings and records, they do look at what their benefit payments could be or should be, they look at what Medicare enrollment looks like. But as you go toward creating a formal retirement income plan, very few people invest the time, energy or effort to actually understanding how to decumulate assets, which is what creates a gap in confidence,” he says.

The Principal report also found that 98% of plan sponsors say calculating how much they need to retire comfortably is a top retirement income planning topic where employees need help. Meeting with a financial professional regarding retirement savings and income planning was second at 89%.

Reddy explains that policymakers, through legislation, have recognized the need to show workers how their accumulated total balances will translate into monthly amounts, because “most people don’t know if that translates into what they need and if that’s going to be enough for them.” He advises that to help participants, plan sponsors can provide retirement income calculators that include lifetime income illustrations.

The 2019 Setting Every Community Up for Retirement Enhancement Act required that participants’ retirement plan account statements include lifetime income illustrations based on participants’ accumulated plan balances. “Some type of translation like that will help,” Reddy says.

Addressing Overall Financial Wellness

Many plan sponsors are putting more resources into employees’ financial wellness, but they must ensure programming is targeted to address workers’ needs and track the results, Reddy says. “There are many providers, including Principal, that provide plenty of tools, guidance and education—we have on-site enrollers who can assist—but it may not be enough,” he says. “It may not provide the one-to-one guidance, counseling and coaching employees are desiring.”

He adds that plan sponsors must think about how to actually engage with employees and provide them with meaningful financial education so that they feel confident.

Plan sponsors can do better to help plan participants improve their readiness and address the top issues employers see by helping workers look at their financial picture overall rather than in silos, Reddy suggests. Participants are torn between many financial priorities, including saving for a home at a time of rising prices, paying down student debt, and buying groceries as inflation spikes, and for many, “retirement is going to seem elusive and a long way off,” he says.

“The conversation needs to be all-encompassing and inclusive, to say, ‘You’re going to be okay, here’s some steps you can take now, here’s some things you need to be thinking about over the next however many years and here are things you need to think about as you transition to retirement,’” he explains.

A report from Alight Solutions, “Improving Retirement Readiness for Underrepresented Groups,” includes several more tips for plan sponsors to improve their participants’ retirement readiness.

Data from the Bureau of Labor Statistics shows that the number of non-white U.S. workers has doubled since 1979 and currently stands at one-quarter of the workforce. The report says the Hispanic portion increased from 5% to 18%, and women now make up almost one-half of the civilian workforce.

Plan sponsors will have to bring to bear solutions and products that help demographic groups which have lagged in accumulating sufficient retirement savings. One solution is for employers to help workers build up non-retirement savings and establish emergency savings, according to Alight.

Plan sponsors can also consider diversity, equity and inclusion in the investment selection process and use a diverse savings communication strategy that tailors communications to the workforce. Other things Alight suggests for helping employees with retirement readiness and financial wellness include building benefits equity into the retirement with a plan contribution that is not tied to a match, using a backsweep or stretch match, and helping participants keep small plan balances earmarked for retirement.