Keeping on the retirement savings track

By Eric Levy, Mercer HR

Your employees' future retirement income depends on how much they save now. The challenge for HR professionals is to help keep them on the savings track.

Without the level of Social Security and pension benefits that buoyed the savings of earlier generations, today’s employees are realizing that their retirement dreams hinge on their own personal savings. But few believe they’ll be able to save enough money to support the lifestyle they want in retirement. The good news is that HR professionals and administrative service providers are in the position to help employees balance today’s priorities with future financial needs – even after they leave a company.

What the numbers show
The 2006 Mercer Workplace Survey paints a picture of how employees today are viewing their financial future. Out of the 1,700 401(k) plan participants surveyed nationwide, 81 percent see their own savings and investments as their primary source of retirement income. When asked how much of their current annual income they felt they would need to live on in the future, 82 percent was the reported average.

While it appears that these investors have a realistic view of retirement and how much money they’ll need to support it, fewer are confident in their ability to achieve their savings goals. Of the employees surveyed who had a target retirement income, only 28 percent felt they’d be able to save enough money to reach their target. This statistic helps explain why “saving enough for retirement” topped the list of financial worries for 21 percent of respondents. Although the rest of those surveyed didn’t report losing sleep over their lack of savings, a full 45 percent said they would probably need to reduce their standard of living in retirement. Also concerning is the 24 percent who felt they would actually run out of money in retirement. The picture is not completely bleak, however, considering that more than half believe they still have time to catch up on their savings before they retire.

In order to catch up, employees will need to change their current savings habits, as illustrated by the small percentage of employees in the survey who are currently maximizing contributions to their 401(k) plan. It is no wonder that 46 percent% claimed they would ha’ve saved more if they had it to do over again. Aside from low employee contribution rates, there appears to be another growing reason for America’s low savings rate. According to the Federal Reserve Board’s 2004 Survey of Consumer Finances, over 40 percent% of plan participants still take the cash upon changing jobs instead of choosing a tax-advantaged option.

The need for education
These findings show how critical education is, not just when employees are actively participating in their plan, but also as they prepare to leave their company. Without education, the idea of leaving a job with extra cash in hand – despite the chunk that goes toward taxes and penalties – often proves too tempting to resist. With the help of their administrative service provider, employers can encourage these employees to continue saving – and often at little or no additional cost over standard services.

Traditionally, administrative service providers have made a variety of resources available to encourage plan participation among current employees. These resources tend to include plan design features such as automatic enrollment, target retirement funds, and systematic contribution rate increases to make the act of saving that much easier for employees. Asset allocation assistance through the use of rebalancing tools and model portfolios, along with retirement and investor education, has also been key in boosting plan participation and improving diversification.

While this menu of services is still critical to helping current participants maximize their savings, with continuing education, more employees are likely to stay on track toward their retirement savings goals – long after they’ have left the company. And it appears that employees are receptive to the investment education they receive through the workplace. According to Mercer’s 2006 survey, 32% percent of employees said they look to their employer for asset allocation and investment guidance, while 56 percent% see the company that runs their 401(k) as their primary source of information.

An opportunity to impact employees
Of course, the best opportunity to reach employees with education and positively impact their savings behavior is when you already have their attention. In other words, while they’re still participating in the company 401(k) plan. Retaining that attention as they prepare to change jobs or retire is the key to helping their savings grow over the long term. To help companies achieve this goal, some service providers are offering extended products and services for employees in transition. Here is the product and service offering HR professionals can start to expect as they look for an administrative service provider or review the capabilities of their current provider:

1. Educational communications
Standard communications provided by administrative service providers typically include educational brochures that cover investment basics and outline investment options available through the plan. Other standard employee communication programs promote plan features and the advantage of maximizing those features to help accumulate savings.

Not as common, but equally important, are pieces that explain an employee’s distribution options and associated tax consequences, as well as the resources they can continue to tap into when they retire or change jobs. Employees who receive such communications while still employed are more likely to steer clear of taking a cash distribution when they leave, even under the pressure of paying off credit card debt and other looming expenses.

2. Decision-making assistance
For current employees, call center representatives are a valuable resource in helping with asset allocation and other investment transactions. For departing employees, dedicated retirement specialists – and, often, the technology they use – can play a pivotal role.

Administrative service providers typically provide phone support to help departing employees learn about their distribution options and evaluate what’s appropriate for their unique situation. By understanding the tax consequences of each option, employees are in a better position to decide whether to roll their account balance into an IRA or a new employer’s plan, leave their savings in their existing plan, or take the cash.

Not as many service providers, however, offer technology-based rollover products and services that simplify the often complex, confusing, and time-consuming process associated with the IRA rollover. With access to such technology, retirement specialists can help employees initiate a rollover transaction with a variety of leading IRA providers in as little as a single phone call, helping ensure the smooth, uninterrupted transition of employee assets. Without this simplified process, employees are more likely to receive a regular distribution check by mail. If they fail to roll it over in the required time, hefty taxes and penalties are triggered and a significant part of an employee’s retirement savings and future retirement income potentially jeopardized.

3. Ongoing resources
HR professionals dedicate significant time to selecting investment products and services that best suit their employee demographics. These days, it’s becoming easier to extend this selection to retirees so they can continue accumulating and managing their savings. While not all service providers offer the following products and services, the trend is gradually gaining ground.

• Income mManagement aAccount – This product is designed to help investors manage their total retirement savings – from 401(k) plans, Social Security, IRAs, savings accounts, and other sources – in one central place. This type of account allows retirees to consolidate their various assets and access professional money management. It also provides tools to help them track their income and expenses as well as manage transactions such as check writing, debit card spending, and bill pay. Such features can prove especially useful for retirees who need additional assistance allocating their savings among a variety of investments, as well as monitoring their income, expenses, and withdrawals to make their savings last.
• Advisor referrals and networks – While employees who leave their company for another job will likely regain access to investment education and other resources through their new employer, many retirees find themselves at a loss when they stop receiving investment guidance. Fortunately, retirees who lack investment experience will start finding the help they need as more service providers offer continued access to professional investment advice.
  Advisory services come in a variety of packages to meet the varied needs of employees. For beginner to intermediate investors, services may include online retirement assessments and investment-specific advice through an independent third party. For retirees with more complex portfolios and investing needs, services may include referrals to local, independent advisors who will meet with the employee one-on-one to review their total investment portfolio and provide customized recommendations.
• Annuities – Like traditional IRAs and employer-sponsored 401(k) plans, money in your former employees’ accounts can continue growing tax-deferred until withdrawn through an annuity. While these products provide income and insurance features, employees need to understand the advantages and drawbacks of this investment vehicle, which is where an investment advisor can help.

Considering the hectic pace most HR professionals keep, it should be encouraging that providing extended investment services for retirees comes with little, if any, additional effort. Instead, the role of helping retirees and job changers to continue saving after leaving a company seems to have fallen naturally into the hands of administrative service providers as they look to add value on a new front. For corporate HR, it’s important to ensure that the company’s service provider is – or will be – offering these extended services. Through this synergistic partnership, companies and their service providers can help former employees keep their retirement income on track and, as a result, keep moving toward a more comfortable retirement.