An Open Letter to Employers

There is a national debate right now on how to make 401k plans more effective for retirement plan participants. The question isn’t “how do we supply the workforce with access to retirement savings vehicles?”, but rather “Why are so few employees taking advantage of these important benefit offerings?” In the end, it’s about a lack of familiarity and trust.

In the June 20th edition of the Wall Street Journal, Anne Tergesen authored “Five Ways To Improve the 401(k).” As immersed in the retirement plan industry as I have become, I found the article to be sound, but not necessarily unique. As with most articles on the topic, it presented ideas through automation and innovation for 401ks that included raising default savings rates in plans with automatic enrollment, expanding access to plans for the broader workforce that represent small businesses, and reducing leakage through participant withdrawals and loans. The last two points of the article, helping employees save for other life expenses (college, emergency funds, etc.) and making the savings last through an employee’s retirement, come closest to answering the question that is being posed, but still fall short of the catalyst that will help participants fully take advantage of their retirement plan benefits.

I have been studying behavioral finance and plan design around 401ks since I entered the financial services industry as both a representative of 401k providers (the companies that employees see on the website when they log into their retirement plan accounts), and now as a retirement plan advisor. Having personally met with hundreds (if not thousands) of retirement plan participants in my career, I was enthralled with helping employers design plans that would help participants take the “thinking step” out of contributing to their 401k.   In the most automated plan designs you can do almost everything to get an employee to start contributing to a plan immediately, automatically increase their contribution annually, and invest in a fund that rebalances for their expected risk tolerance over time so that they don’t have to worry about picking their investments. There’s no mistake about it, what we know about how participants behave and the design of a retirement plan have helped the workforce to get on a better track for their retirement savings, but as an advisor I’ve been able to have the real conversations with employees about why they “don’t” (more frequently I hear participants say they “can’t”) save in their retirement plans. My conclusion, the industry has made it “easy,” but we haven’t done much to make it understandable or comfortable. The fact is that we, the American worker / consumer, invest in what we understand and are comfortable with.

Many employers I speak with think that their employees should have the same “bootstrapping” mentality that led the employer to become successful business owners. Find out what you need to know, implement what you know, and adapt with time for your desired outcome. Ultimately, it’s on you to get what you need to get to where you want to go. The truth is that employees don’t usually operate in that mindset (some have acknowledged that they want to be their own boss and have thought of business ideas to launch, but they sit inert in the back of their minds) because their discomfort and lack of familiarity lead to myopic behavior. Aversion to loss, as Daniel Kahneman and Richard Thaler presented, is twice to two and a half times more impactful than the same relative unit of gain, and  participants don’t want to lose in their investments or their perceived comfort.

That being said, “why should employers be invested in the financial health of their employees?” Some employers, the “bootstrappers,” don’t see intrinsic benefits of a financially healthy organization, but recent studies indicate they should. Research has shown that retirement “ready” participants have lower stress levels, are more productive in their roles, and save the organization money in other benefit costs by helping participants retire on time.¹ Showing a CFO a cost reduction forecast, and an HR specialist a happier workforce make the point clear as to why financial health should be a priority.

“When the student is ready the teacher will appear.”

– Buddha Siddhartha Guatama Shakyamuni and the Theosophists

So then, how do we help participants take action with effective planning and savings behaviors? We have to start thinking about being coaches, not providers. We have to create trust in the process, project belief in the offering, and help employees understand the two inevitable outcomes of their current actions. Only then can we overcome the true barrier to employees taking action through retirement plan benefits.

  1. Create Trust. You’re an employer, and your employees view you through a different lense than their peers. Most often your are a respected member of their networks. Acknowledge that understanding how to prepare for the future, and investing can be two of the bigger and more complex decisions that they will encounter in their lives. Acknowledge that everyone is in the same boat, and promote that they owe it to their future selves to exploring their options. By making the retirement “dilemma” relatable from a position of regard, you’ll allow employees trust that they can take steps to better their understanding and future.
  2. Project Belief In the Benefit and In the Participant. Discussing why the organization has chosen to offer the benefit that is in place for the employees, and what it takes for the company to provide the employees with the plan in time and cost to the organization will promote the value of the plan. Sadly, most employees still look at 401ks and the like as entitlements that every business must provide to their employees (until they work for an employer that doesn’t provide a plan), rather than valuable benefits that the organization chooses to provide. As an employer, you know that the plan is not free, and it demands precious time for your senior leadership to maintain. Helping employees understand your commitment to them and the offering will project the organization’s belief in the retirement plan, and the employees / participants.
  3. Identify The Outcomes For Every American Worker. When it comes down to it, there are only two outcomes. An employee will either retire on their own terms and live a retirement with dignity and independence……..or not. It’s that simple. Situational differences aside, the employee owes it to their future selves to be able to live the way they want to, not the way they may have to. The retirement plan is an opportunity to have a higher likelihood of retirement “success” than not participating, and they can start as soon as they are elibible for the plan. In the face of a rising cost of living, participants balk that the idea of sending valuable dollars from the coffers supporting their current needs to the accounts that will support their future, anticipate the objection. It happens in more than two thirds of the conversations I have with retirement plan participants, but when a participant truly understands the benefit of financial independence in retirement, they will start to understand how their current lifestyle and choices may not support their long term goals. It’s important to present this point after creating trust and projecting belief in the plan, because this is the hardest point for the participant to come to grips with and it’s not the most intriguing thought process ( impact of pain vs. gain), but the employees that heed the call will forever remember the conversation positively when they are more prepared and able in the future.

Changing employee perception towards saving for retirement is a process of care and communication, not just offering a plan or conventional financial education. If we want more of our workforce to utilize 401ks, we have to eliminate the barriers of distrust and misunderstanding with them to promote healthy savings actions. While you may not have wanted to be a maternal / paternal figure in the lives of your employees, your employees, your business, and the future generations of retirees will thank you for playing an active role. You’ve led the horse to water by offering a plan, make it as easy as possible for them to understand the value of “taking a drink” by participating effectively.

Pat Alfano

Pat joined the Prosperion Financial Advisors team in August 2017 as a part of the Anderson team, and brings ten years of experience in the financial services industry. Starting out as an “advisor to advisors” in 2007, Pat developed his industry experience by helping advisors bring solutions to their clients with mutual funds, separately managed accounts, insurance based products, and employer sponsored retirement plans. Pat started working with clients of his own in 2015 as an advisor to individuals and institutions, and has enjoyed being able to deliver goal focused results. As an advisor, Pat believes that every individual and group deserves quality financial advice and planning regardless of their stage in wealth accumulation or distribution. As an advisor, Pat develops customized strategies for individuals and organizations in light of their unique goals and aspirations.

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This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

1. Retirement Readiness & The Bottom Line, Presentation, Mass Mutual, 2016