London Market Monitor – 31 August 2022
Our August review of the markets and Solvency II discount rates.
Everyone wants to retire someday. When I imagine my retirement years, I envision traveling, a garden, a lovely wraparound porch, and lots of lemonade—I am relaxed with very little worry. In reality, I think of my grandparents and their struggles—their unexpected medical issues, their inability to work, and amassing bills.
The average retirement age is slightly different depending on where you live. For example, in Washington state the average retirement age is 64, but if you live in Alaska you might expect to retire at age 61. No matter where you live though, if you retire before you are eligible for Social Security and Medicare, there is a gap to be made up. Assuming Social Security remains viable, most people cannot collect full Social Security until age 67 and cannot apply for Medicare until age 65.
Millennials (born 1981 to 1996) and Generation Z (born after 1996) are facing unique challenges planning for retirement. Trying to balance paying for today while preparing for tomorrow, which may be 40 years from now, is a delicate balance where the pressing needs of today usually win. Millennials that I have spoken to agree that they and their friends do not believe they will have enough savings to retire comfortably until they are over age 70, or possibly not at all.
According to the U.S. Bureau of Labor Statistics, in 2020 33% of private industry workers do not even have access to any kind of retirement plan. For those who do have plans available to them, many do not enroll to take advantage of the benefits available.
For employers who would like to attract and retain this tech-savvy group, offering retirement benefits can be an advantage. Educating current and potential employees about the benefits offered by a company and the retirement security provided can set a company apart as one that values its workforce.
The first step for employers who do not have retirement benefits available for their employees is to connect with a consultant, such as Milliman, to help design benefits to attract the desired workforce. Several different retirement vehicles can be offered by employers, and an experienced consultant can aid in constructing the right configuration for your company.
For example, the traditional retirement plan—defined benefit (DB)—can take several forms but typically offers employees a fixed retirement amount that is not based on investment returns1. The employer generally funds the plan and is responsible for managing the assets for the promised benefits—the investment risk and the tax advantages fall onto the employer and not the employee. This can be attractive for those who do not want to navigate the investment world but want to have a known benefit at retirement to fall back on. A defined benefit plan can also allow a lump sum distribution at any age. This means that the benefit can be portable, which allows employees to take the benefit with them if they move employers.
The more familiar defined contribution (DC) plan, such as a 401(k), is funded by contributions from the employer, employee—or both. Contributions are sheltered from taxation while they remain in an employee’s account. Employees are given the option to enroll in the plan at any contribution or deferral level. In addition, employees will select how to invest their funds. In essence, the investment risk is shifted to the employee and the amount available at retirement will be determined by the employees’ level of contributions and investment choices. This can be attractive to those who have investment knowledge and want to start contributing at a young age. The benefits from these plans are very portable and can be moved from employer to employer.
Once a benefit structure is in place, there are many ways an employer can promote the benefit programs and help workers build retirement funds.
While many people appreciate the interaction of a live call representative, Millennials expect to have access to information online. The ability to view the current value of benefits online, model benefits for different ages or life events, and utilize self-service is a must these days. If interaction or questions are to be asked, email or chat is often preferred. A third-party administrator (TPA) can provide both a call center and an interactive online experience for all levels of employees.
Group or individual targeted education, such as meetings, fliers, or presentations, can also help inform a workforce. Meetings and presentations can be in person or virtual based on the workforce needs. They can be held regularly for all workers to aid in retirement planning, and targeted sessions can be given to those who are approaching retirement to help them understand how to prepare for the next phase of their lives.
If you already sponsor a defined benefit plan, or intend to adopt one, it is especially useful to educate your younger employees about the benefits of these plans. As 401(k) plans are far more popular among current employers, educating your current and potential workforce on the long-term benefits of these plans can highlight how they will positively impact their future financial security.
There are many retirement planning tools available online. Many are free but are not necessarily user-friendly. In addition, employees must have all of their benefit information available. If, however, you engage a third-party administrator to help with your plans, they will provide retirement tools for your workforce that will prepopulate the benefits available for the individual into the tool where applicable.
Attracting and retaining employees has many advantages, including reduced costs of hiring and training, increased productivity, better customer experience, and dedicated company experts. Providing retirement benefits to employees will not only offer them security in their golden years; but educating them on how to maximize and use these benefits to the fullest will demonstrate the value the company places on them.
Finding the right benefit structure for your company’s needs can be difficult, but an experienced benefits consulting firm can help you find your way. They can also help convey the value added for your employees and offer administration services and retirement planning tools.