Many of your employees are overestimating the longevity of their working years. In fact, Employee Benefit Research Institute data shows that 67% of current workers expect to retire at age 65 or older. However, a staggering 43% end up retiring earlier than originally planned1.
Talk about a wake-up call!
An employee that thinks he or she has a few more years to work — and save – may have to majorly overhaul their retirement income strategy as the new reality of an early retirement comes into focus.
Plus, if they have not adequately saved the recommended 15% of salary, this fact may result in a detrimental set of circumstances for many employees in their later years.
This contradiction between the expectation of choosing when retirement happens and the reality of unexpected, early retirement can have detrimental effects on an employee’s income level post-employment.
Employers have the power to greatly improve or impair an employee’s standard of living of future retirement by helping them save now.
Recent studies2 continue to support the idea that employees want to be “nudged” toward saving for retirement. So, how can you as an employer point them in the right direction?
Employers can implement automatic features into their plan design — with one of the most popular features being employer contributions, both matching and non-matching.
Although non-matching contributions definitely have a purpose, our recommendation is to consider a matching contribution structure as a design feature in your retirement plan.
An employer matching contribution means that an employer intends to “match” a certain percentage of compensation if the employee is willing to contribute all or a portion in return.
It is one of the top motivating factors for employees to save more and top reasons why these employees have higher amounts of retirement savings on average.
Employees have proven time and again that they will not pass up “free money.” The most common incentive method is matching dollar for dollar up to a specific percentage of an employee’s salary. For example, in order to encourage a 15% total savings rate between the employee and employer contribution, you might consider a dollar-for-dollar match up to 7.5% of salary.
And you may think, why not primarily use the non-matching employer contribution design? If your organization plans on providing an employer contribution anyway, why not encourage employees to get some “skin in the game” and have a vested ownership in their retirement savings by having them take the first step in order to receive the match.
Many employers that excel in preparing their employees for retirement do so by combining both matching and non-matching features. (As mentioned earlier, non-matching contributions have a better place and purpose being part of an incentive structure.)
One of the most common and successful scenarios offers a 5% non-matching contribution and a 5% matching contribution from the employer. Therefore, the employer contributes 5% of salary automatically as a non-matching contribution. In addition, if an employee voluntarily contributes an additional 5%, he or she will receive an additional 5% matching contribution from the employer. In this scenario, the employee who is willing to contribute 5% of his or her own money will have a total of 15% going back for retirement.
Nudge Your Employees Towards Saving| 5% non-matching, employer contribution | |
| 5% employee contribution | |
| + | 5% matching, employer contribution |
| 15% total contributions |
Do not wait until your next benefits meeting to talk about the benefits of saving for retirement. Saving for the future should be part of an ongoing conversation with your employees, not something that is pointed out once per year. Make it a point to keep financial education at the forefront of your communication with employees. Remember, they desire this nudge!
If you are a church operating a flexible plan document, you may be able to implement matching through your internal policies and procedures. If you have further questions, contact us at RetirementImplementation@GuideStone.org to discuss enhancing the benefits of your current plan design.
1https://www.ebri.org/docs/default-source/rcs/2019-rcs/2019-rcs-short-report.pdf
2https://www.marketwatch.com/story/why-nudging-works-people-need-a-push-when-it-comes-to-retirement-savings-2017-10-11
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