One of the more troubling trends in the workplace is the growing number of older employees in the US who are finding that they have not saved enough to retire and live comfortably for the rest of their lives.This comes as employers have largely moved away from defined benefit plans, such as pensions, and toward defined contribution plans, such as the 401(k).Such defined contribution plans are not designed to generate lifetime retirement income, and they place significant responsibility on the employee. Yet with the decline of pensions, the 401(k) has become the primary retirement vehicle in the US today.
Organizations and their employees are starting to recognize the consequences of this seismic shift. Many workers, concerned about their future, are delaying retirement for as long as possible. As a result,employers are finding it more difficult to transition smoothly from one generation of workers to the next.
Employers can do a lot to help their employees prepare for retirement, from providing customized guidance to securing lower costs for retirement income products. And there are many advantages to doing so. Helping employees retire when they want to will give businesses greater flexibility in managing the workforce. It will also boost employee engagement and loyalty and enhance the organization’s brand as a desirable place to work. All of these benefits can translate into a competitive advantage. But perhaps the best reason for helping employees retire comfortably is the simplest — it’s the right thing to do.
Today’s employees face unprecedented challenges in saving for retirement. People are living longer than ever, and many will need retirement income for 20 years or more. Many will face substantial medical and long-term care costs, particularly in their later years. At the same time, their retirement income is typically tied to a volatile and unpredictable stock market that has seen four major meltdowns since 1987. There are other risks, including inflation, poor advice, and poor decision-making, possibly due to cognitive decline.
Employees are clearly worried. Mercer’s 2012 Making Smart Benefit Choices survey found, for example, that almost three-quarters of near-retirees were concerned about their readiness for retirement.
RETIREMENT INCOME PRINCIPLES
To guide employers, Mercer has developed a series of “Retirement Income Principles.” Some outline the best strategies to help employees generate retirement income, while others offer practical advice for employers as they design and implement their intervention efforts.
MERCER’S PRINCIPLES FOR EMPLOYEES
- BUILD A SOLID INCOME FLOOR. At the very least, retirees need a level of income that will enable them to meet their day-to-day living expenses. A sound retirement plan can provide for this income floor though a variety of options, such as an existing benefit plan, an annuity, and insurance coverage for employees living beyond a certain age. A second tier of the income floor, for those retirees who can afford it, provides replacement income to preserve the current standard of living.
- AVOID TOO-RAPID INCOME DRAWDOWN. Perhaps the greatest obstacle to maintaining an income floor is the tendency among many retirees to draw down their nest egg too quickly. A study by the National Bureau of Economic Research, a nonprofit, found that drawdown rates as high as 8% a year are common among recent retirees — double the rate many experts recommend.
- DESIGN TO THE “U.” A chart of retiree spending tends to look like a U. Spending is typically higher during the early-retirement years, levels off as retirees slow down, then picks back up again as medical and care expenses rise. Retirement-income plans need to take this pattern into account.
- PUT ALL WEALTH TO WORK. Retirement planning should take into consideration how income might be generated beyond the basic retirement savings plan. Possibilities include leveraging home equity and continuing some form of work after retirement. In addition, Social Security can be optimized by delaying the start of benefits.
- MANAGE MARKET AND LONGEVITY RISKS. Employees can take a number of steps in these two critical areas. One strategy, for example, is to gradually lower the market downside risks in those portions of the retirement portfolio that are not needed to build the income floor.
MERCER’S PRINCIPLES FOR EMPLOYERS
Mercer also has developed seven principles to help US employers develop a successful intervention program.
- UNDERSTAND THE WORKFORCE THROUGH SEGMENTATION. Employers should first determine what proportion of their workforce is currently underfunded, on track, or overfunded for retirement, and find out how the employees want to manage their retirement planning — whether “Do it for me,” “Help me do it,” or “I’ll do it myself.” This knowledge will help the employer develop interventions geared to its particular workforce.
- OFFER A RETIREMENT INCOME MENU. A comprehensive menu will enable employees to customize their plans based on their own needs. Such a menu can be guided by segmentation; for example, an employer with a workforce largely underfunded for retirement might offer more choices on the menu for retirement income generation.
- LEVERAGE BUYING POWER. Employers should maximize their buying power to provide employees with retirement products at costs far below those offered on the retail market.
- INTEGRATE WORKFORCE PLANNING INTO THE RETIREMENT STRATEGY. Some employers seeking to retain the expertise of older workers may offer them part-time schedules as they transition into retirement. It is important to align these types of workforce strategies with retirement-income interventions.
- PROVIDE ASSISTANCE. Employers should proactively work to guide their employees through retirementincome planning with such methods as seminars, online planning tools, regular statements that stress income-generation potential, and access to retirement-planning advisors.
- MANAGE THROUGH THE LIFE CYCLE. Employers can help their employees prepare for retirement by providing options and assistance throughout their careers, not just when they are nearing retirement.
- KNOW YOUR FIDUCIARY POSITION. An employer should engage with the appropriate internal committees and external advisors to ensure that its retirement-income strategies are aligned with the organization’s broader governance and fiduciary structure.
Developing a successful retirement-income program for employees does not have to be a daunting task. Employers now have access to a broad range of emerging retirement products and innovative approaches. And there is typically no need to increase spending or build new capacities from scratch — rather, employers can leverage their current infrastructure in new ways.
Employers can do much to help ensure their workers have adequate and sustainable retirement income. The benefits for both employers and employees are significant and tangible.
Learn more about how Mercer can help employers create a retirement-ready workforce.
|Fergal McGuinness (Zurich)
Senior Partner, Global Defined
+41 44 200 4528
|Amy Reynolds (Richmond, VA)
+1 804 344 2639
|Arthur Noonan (Pittsburgh)
+1 412 355 8836
|Toni Brown (San Francisco)
+1 415 743 8855