Is Confusion the Reason Why Employees are Unprepared for Retirement?
When we step back and really look at the purpose of our industry - what is it? It is to help people retire comfortably on time and with a smile on their faces. We do what we do so when they reach the end of their working years, they can happily retire.
Then why with an entire industry full of great advisors, TPAs, recordkeepers and service providers dedicated to making this happen are millions of workers unprepared? Confusion may be the number one culprit…
The workforce today spans 5 generations. When the baby boomers started their jobs, they thought they would have a pension and their employer would fund their retirement. Then, the world changed: pensions were out and defined contributions were in. Yet, the pension mindset still persists. In a recent TIAA Nuveen study, it was found that 50% of 401(k) participants believe they are guaranteed money from the target date and mutual funds!
DC plans came out in the middle(ish) of these baby boomers’ working careers at a time when they were stacked with midlife responsibilities (mortgages, raising a family, aging parents). It’s not surprising that saving for their own retirement was not a priority. They were still operating under the ideas that they had a pension.
This confusion continued as the next generation entered the job market. Some older employees still had a pension - and probably boasted about it at the water cooler. Younger, impressionable employees could have overheard these pension conversations and assumed that they too had a retirement guarantee.
Millennials have a complex relationship with the financial services industry. Having been brought up during the 2008 recession, watching their own parents struggle with finances and a ballooning student loan debt, they now have a deep distrust of the industry and little faith that their employers with pick up their retirement tab.
Yet, many Millennials struggle with financial budgeting. They were never taught these skills through their education and as such they don’t possess them as adults. This too creates confusion. How much should I save? What does 10% mean? Is that good? Bad? How much do I need? Will I be here? Will the planet be here?
These are real questions that confront this age demographic. And many believe that it’s a lost cause. Because they worry that it’s impossible to save that much, therefore, it’s not worth trying. They give up before they even start. So, what are we to do?
Remove the confusion
How do we do this? For any advisory firm and TPA practice with the term Pension in its title, remove it. The term “pension” implies that the employee is not responsible for their retirement future; instead it’s taken care of by the employer. But for most Americans, that’s not true. By removing the term for thousands of companies, it stops the spread of misinformation.
Talk about percentages as pennies. Can you save 10 pennies per dollar? Great! Put 10% into your company’s retirement plan, or 10 pennies per dollar. Also, as an industry, we should talk about helping savers aim for 10% as the new normal. Next time you’re out and someone says how much should I save - the answer is 10%.
Why 10%? If you look at Dimensional Funds research on savings rates and behaviors, most of the time, the math works out to be 10% per year, plus the employer match will put employees on a successful path. It’s important to start early. So, remember two things: save 10% and save early.
Thanks to the SECURE Act, the annuities are coming. Let disclose the lifetime income calculation and put it front and center. If you retire today, this is how much your current account balance could pay out per month. Whatever the number, for most it’s going to be one very scary statement. That’s okay. Better to know now when there is time than to learn this information on the last day of work.
To ease the shock experience, we should be ready with education, ideas on getting out of debt, trimming the budget, how to save more, calculators to show how changes will impact probability, and other financial wellness resources. Also, reminder pieces that the road to retirement is filled with bumps and turns - but that’s okay. Here is how you can keep building a confident future.
Closing the Generational savings gap
With over five different generations in the workforce, what can we do as an industry to reduce the confusion? Honestly, we’re doing it. It just takes time.
Today 71% of workers having access to a retirement savings plan - and that’s incredible! It is due to all of our hard work. At the end of 2019, the number of 401(k) millionaires hit an all-time high! The average pretax savings rate has gone up to 7.6%. Millennials are saving at a statistically relevant rate to replace their income in retirement.
These are all huge wins; so great work everyone! We’re doing it; and with each new campaign, we’re removing the confusion. We’re educating the population. We’re moving them all one step closer to our industry’s goal of helping people retire on time, comfortably, and with a smile on their faces.
Thanks for reading and happy marketing!
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TIAA 2019 Lifetime Income Survey. TIAA. Sept 2019. Bureau of Labor Statistics "Employee Benefits in the United States. September 24, 2020. CNBC. “The number of 401(k) millionaires hits a fresh high.” November 14, 2019. T.Rowe Price. “Reference Point.” 2020.