The COVID-19 pandemic was an obvious call-to-action for employers to consider their employees’ physical wellness. Many stepped up to help provide safety measures or remote work opportunities for their workforces. But many employers could not weather the financial impact brought on by the pandemic, forcing them to lay off employees or adjust spending in other ways.
Now, in addition to physical wellness, many are seeking ways to address the financial wellness of their employees, both now and into retirement. But with lingering economic uncertainty, some find it a challenge.
A recent study by Transamerica Institute helps shed light on the struggles and opportunities that both employers and employees face. The findings may serve as conversation starters for financial advisors who want to engage with clients, whether they are the employer or the employed.
1. Employers Are Cutting Costs
By late 2020, seven out of 10 employers were negatively impacted by the pandemic, prompting more than half (54%) to implement cost-cutting measures, including layoffs, elimination of bonuses, furloughs, salary freezes or reduced wages.1
For some, the financial impact of the pandemic may have been temporary, but the aftereffects could be long term. Reduced wages in any form could unexpectedly derail a client’s financial goals, especially if they withdrew from retirement savings to make ends meet. Other consequences might include credit card debt, a default on a mortgage loan, unpaid rent or past due bills, which could also impact credit ratings. Talk with clients about their current employment situation and strategize ways to fill potential gaps.
2. Retirement Benefits Differ Among Employers
A little more than half (52%) of employers offer their employees a 401(k) or similar employee-funded retirement plan. Not surprisingly, these plans are more commonly offered by large and medium companies, rather than small companies with fewer than 100 employees. By contrast, only 17% of employers offer company-funded defined benefit plans. About half of small companies offer no retirement benefits at all.1
If you have clients who need to build their own retirement strategy without the help of an employer’s retirement benefit, a traditional or Roth IRA is a consideration. These plans may actually offer potential advantages over an employer plan, including more flexibility and access to penalty-free withdrawals for qualified exceptions. A conversation about creating their own pension through an annuity can also be part of the mix.
3. Hesitancy to Start Offering Retirement Benefits
With a growing labor shortage and heightened efforts to retain skilled workers, you would think that more companies are considering offering retirement benefits as an incentive. However, only about one-third (37%) of companies that don’t currently offer an employee-funded plan indicate that they will likely begin to do so in the next two years.1
Of note, however, is that three in 10 of those who said they probably won’t offer a plan might consider joining a multiple employer plan (MEP) or pooled employer plan (PEP) where much of the administrative duties are handled by a fiduciary at a reasonable cost.1
The SECURE Act provided opportunities for smaller organizations to pool their resources and offer retirement savings options with reduced burdens and costs.2 Consider helping clients who are also small business owners explore these possibilities.
4. Managed Services Becoming Commonplace
There’s been a shift from the one-size-fits-all retirement plan offered to employees. Managed accounts and asset allocation suites as part of 401(k) or similar plans are now offered by 87% of plan sponsors, with large companies being more likely than small companies to offer such benefits.1
This is good news for employees who aren’t savvy investors and want help with planning and allocating assets in a way that’s tailored to their goals and risk tolerances. Employers with plan sponsors who provide professional advice, online tools, emails and other resources can help employees better plan for the future. Talk with clients to explore how robust their workplace retirement plans are and whether they’re taking full advantage of the plan features and contribution limits.
5. A Need for Retirement Guidance and Assistance
Even though managed services are on the rise, few employers provide assistance to their employees on how to transition their savings and finances as they near retirement. Fewer than four in 10 offer educational resources or materials, information about distribution options, referrals to the company’s retirement plan provider and guidance about how to transition into retirement.1
In short, many of your clients are probably going it alone as it relates to their workplace retirement benefits and aren’t getting the assistance they need, especially when it comes to the transition from work life to retired life. They may keep putting in, but likely have little idea how their workplace investments will be distributed once they retire, let alone whether there will be enough to last a lifetime.
This presents a significant opportunity for financial advisors to show their value by assessing how their clients’ workplace retirement plans align with the rest of the investments you help manage for them. Some questions to consider include:
- How is the plan performing year over year?
- Should they contribute more to their workplace plan or allocate additional funds elsewhere?
- Should annuities be a consideration to help bridge the gap between their working years and claiming Social Security benefits or to help secure lifetime income?
While an advisor may not be able to influence how a workplace 401(k) or other plan is allocated, you can still help your clients evaluate its effectiveness and how to fill any gaps. These conversations are especially prudent in the five years leading up to retirement when little time remains to make up any potential shortfalls.
The pandemic added another layer of uncertainty and confusion as it relates to retirement planning. Use our Elevate Advanced Planning Resources to help your clients navigate the complexities of the unknown.
SOURCES:1Nonprofit Transamerica Institute, Navigating the Pandemic: A Survey of U.S. Employers, June 2021.
2U.S. Department of Labor, U.S. Department of Labor Announces Registration Requirements for Pooled Plan Providers, November 12, 2020.