Retirement 101: Helping Employees Help Themselves

written by Tess Malon from Talent Management, May 2009

Employees with choices are well-informed economic agents that act rationally to maximize their self-interests. It is assumed they can interpret and weigh information presented regarding benefits options, appropriately evaluate and balance these choices and then make informed decisions. The reality is very different. Employees can be their own worst enemies when it comes to making decisions about planning for their retirements.

Certain types of decisions and problems may be simply too complex for some employees to master on their own. Many employees have the best intentions, but they lack the willpower to carry out the appropriate changes in behavior.

The good news is once talent managers understand what keeps employees from successfully saving for retirement, they can determine how to help employees help themselves.

Plan sponsors must design, regulate and evaluate the institutions that help millions of Americans provide for their economic retirement security. One of the most powerful things plan sponsors can do effectively is utilize framing mechanisms that make it easy for employees to succeed at being the CFO for their retirement plans.

Talent managers have a unique opportunity to craft new strategies that will empower and guide employees toward their retirement goals. How they do this will affect their organizations' ability to recruit, retain and motivate the best workers. It also will determine the financial future of the next generation of retirees.

Three major forces are converging to reshape the retirement landscape. First, life expectancy has improved dramatically. In the 20th century, the average lifespan rose from 47 to 78. Older Americans are healthier than ever before. Retirement, once a few years' respite at the end of life, now commonly lasts 20 years or more. New generations of retirees are challenged to imagine what they want to do and achieve, and to prepare wisely to support the lives they want.

Second, while the economy has reduced these figures somewhat, the number of retirees in the 77 million-member baby-boom generation is the largest in history to leave the workforce. Comparatively, younger population groups will grow modestly or even shrink during the next decade.

Third, the responsibility for retirement saving has shifted to the individual. Earlier generations often could count on an employer-defined benefit plan, or employer-paid pension, to see them through their retirement years. But according to a November 2008 article titled "The Financial Crisis and Private Defined Benefit Plans" by the Center for Retirement Research, since 1980, the percentage of workers with only defined contribution plans has multiplied almost fourfold. And those with only defined benefit plans fell from 60 to 8 percent in 2006. Meanwhile, the age of eligibility for Social Security has risen, along with worries about the federal government's ability to fund entitlement programs at current benefit levels for future generations.

Plan sponsors need to be concerned with these problems because the stagnating growth of the labor force will mean increased competition for talent. The looming shift from an "employer" to an "employee" labor market means employers must respond to employees' needs. Further, employees that don't adequately prepare for retirement will not retire. Employees that should retire but can't will drag down an organization's financial and emotional bottom line.

The most successful organizations develop an intimate understanding of employee needs, behaviors and capabilities. Companies that effectively solve problems for their employees will attract and retain top talent.

The following are some strategies to consider when deciding how best to assist employees in effectively planning for retirement:

1. "Auto-everything plans" address employees who do not participate in retirement plans or do not defer enough by defaulting to an appropriate investment choice. Auto-everything plans are one of the most effective framing tools talent managers have to facilitate retirement planning success.

It is the sponsor's responsibility to make wise choices in plan design. More often than not, participants follow the path of least resistance in their decision making, making the easiest, rather than the best, decisions. Not surprisingly, many participants lack well-informed investment preferences, and these preferences are easily altered by the way choices are presented to them.

Small barriers can have large effects on behavior. It is logical to assume employees would be willing to spend a bit of time to arrive at a proper plan for retirement savings and investing decisions. But research findings prove other barriers such as plan design keep employees from making these decisions. For instance, having a large number of investment choices can negatively influence participation rates in the 401(k).

2. Take the emotion out of investing. Emotions can run counter to good investor behaviors. A person's natural and powerful fight-or-flight mechanism can distract investing behavior unless talent managers educate them to override that instinct and instead rely on rational, informed thought.

Educate participants so they understand that their natural reactions to market activity are normal, but not always conducive to good investing.

For instance, when markets decline, staying invested can be in the participant's best interest. In fact, turbulent times can be an opportunity to invest more. But these often are counterintuitive thoughts. Warren Buffett recently said, "A simple rule dictates my buying: Be fearful when others are greedy, and greedy when others are fearful."

3. Show employees why investing more, not less, is the right choice. A natural reaction to the significant downturn we have experienced recently is fear and a desire to stop contributing. Instead, suggest that employees take this opportunity to increase contributions.

Why? Increasing contributions is the quickest way to boost an account, and now is an ideal time to buy because everything is on sale. It's like buying a pair of jeans. If you have $100 and a pair of jeans cost $100, you can buy one pair. If the jeans are on sale for $33 a pair, you can buy three pairs with that same $100. Why buy one when you can have three? Using tangible, simple examples that employees can relate to and understand will help them to connect the dots.

4. Encourage employees to get interest-free loans. Big corporations are getting help from Uncle Sam with the bailouts; employees can do the same in their 401(k)s. Remind employees that for every $100 they defer into their 401(k)s, they get a free loan from the government because they do not have to pay state or federal taxes on that $100. They get to take Uncle Sam's money and tuck it away in their account for the next 10, 20 or 30 years.

Encourage employees to maximize that free government loan by deferring every possible penny and making their hard-earned dollars work for them inside their tax-deferred savings vehicle: their 401(k)s. Think of it as a personal bailout package from the government.

5. Remember a picture is really worth a 1,000 words. People often assimilate information in picture form at an exponentially higher rate than words and letters. This principle is never truer than when talent managers help employees effectively plan for retirement. A significant percentage of employees have never calculated what they need to save today to maintain their standard of living in retirement. Do it for them in the form of a picture. Some 401(k) vendors will do it for you free of charge. Taking time to do this calculation can be highly effective in changing participant behavior.

Employees who calculate a goal will change their behavior, and of those, almost 60 percent will start saving more as a result of doing the calculation. When presented in a graphical format, a gap or replacement ratio analysis makes employees' choices tangible, illustrating what sacrifices today are worth 30 years from now.

6. Be a good steward for employees' money. Any money participants pay someone else today is money they won't have when it comes time for them to retire. Further, they also lose the magical power of compounding on those monies. The aforementioned money refers to expenses deducted from participants' accounts on a daily basis. These expenses make a big difference to hard-working participants, and talent managers can control them.

Participants are relying on plan sponsors to be good stewards of their money. Roughly, more than 60 percent of plans are overpaying plan expenses. Blue Prairie Group has uncovered overpayment of expenses in 100 percent of the expense analysis projects undertaken during the past six years. Help employees keep every dollar they can in their accounts.

7. Incorporate adult learning principals in targeted educational programs. Participants who receive information about their retirement savings in accord with research-based principles of how adults learn best will increase their retirement-plan contributions. Adults learn best when information is provided using a consultative approach that influences behavior by incorporating three interactive steps: assess, educate and influence (the AEI method).

Plan sponsors should ensure vendors use similar techniques that build on adult learning principles by using a learner-centered process. The techniques are most effective when they engage learners as active, self-determining individuals who will benefit from assistance making informed choices.

Thankfully, we know the barriers keeping employees from succeeding so we can implement strategies to facilitate their success. Talent managers have the ability to dramatically impact employees' quality of life by giving employees information to meet their specific needs and encourage them to make good choices. Thus, talent managers can dramatically impact the return on investment organizations get from the valuable employee benefit dollars they spend on these programs.

[About the Author: Tess Malone, AIF, FLMI, PRP, is an institutional retirement and investment practice leader at Blue Prairie Group, an HR and investment consulting firm.]