Making Retirement Plans Clear for Employees

According to the United States Bureau of Labor Statistics, about 70% of all private industry workers have access to retirement plans. However, a study from Pew Research found that many of these individuals do not understand how their retirement plans work. The Pew survey found that only 25% of workers understood their fee disclosures after reading them, and the majority of workers never actually read these disclosures in the first place. Surveys also show that certain workers––including younger individuals, low-income workers, and certain minority groups––are less likely to understand their employee retirement planning options than others. Companies benefit when they communicate the value of their retirement plans to prospective and current employees.

The Seven Retirement Planning Steps

According to the Investor and Financial Education Council, there are seven main steps for retirement planning. These include

Thinking

The first retirement planning step involves thinking about retirement goals. Employees should imagine what an ideal retirement would look like, and they should consider their unique priorities during this initial stage.

Budgeting

The second step involves budgeting a certain amount of money for retirement. Employees should think about how much they can afford to contribute to their retirement plan on a bi-weekly, monthly, or annual basis, and how much they need to cover their living costs both now and in the future.

Sharing Thoughts

Retirement planning should involve the whole family. Employees may wish to discuss their plans with their spouses, parents, children, and other individuals. These family members may also offer guidance based on their own experiences.

Acting

This retirement planning step involves putting the retirement plan into action. During this stage, employees may contact their employers, express their desire to participate in a retirement plan, and begin contributing funds. Employers can then work with Wisterm to meet the needs and goals of their employees.

Saving

After an employee has contributed funds to their retirement plan, they may consider options to add to the plan. This might include recurring contributions or the investment of plan funds.

Protecting

Retirement planners may also protect their plan with insurance with several options. An experienced business consultant can advise employers regarding some of the most common and cost-effective policies.

Reviewing

Employees should constantly review and reassess their retirement plans throughout their careers. Certain adjustments may be necessary to get the greatest benefit from their plans.

Options for Retirement Plans

Pension Plans

Pension plans are now rare in the private sector, and they have been largely replaced by 401(k)s. Pension plans provide a specific amount of money to an employee once they retire, and they are common among government employees. Employees cannot control the investment of their pension funds, and these funds are managed by investment professionals.

Matching Contributions

An employer may choose to match retirement contributions made by their employees. Although this is not a plan, it is a common strategy for employers who wish to incentivize and reward retirement planning among their workforces. One approach is for an employer to match every dollar that an employee contributes, effectively doubling the total retirement funds. The matching percentage may also be lower than 100%, and much lower rates of approximately 10% are common.

401(k)s

401(k)s are extremely popular in the private sector, and although they were originally designed only to supplement pensions, they have completely replaced pensions for many companies. Employees make contributions via deductions from their paychecks before taxation. Employees have several investment options for these funds, but mutual funds are most popular. Capital gains in a 401(k) are tax free with no limits. Employees are responsible for the success or failure of their 401(k) investments.

Individual Retirement Accounts

Individual Retirement Accounts, or IRAs, are retirement vehicles that employees can set up on their own through banks. There are many types of IRAs, and they may offer various limitations and tax benefits. Like 401(k)s, capital gains within IRAs are tax-free. While banks offer traditional IRAs, companies may offer Simplified Employees Pensions (SEP) IRAs or Savings Incentive Match Plan for Employees (SIMPLE) IRAs.

Benefits of Retirement Planning for Employers

Retirement planning offers benefits to both employees and employers. Employers benefit because their employees may experience less stress and paranoia about the future, leading to higher productivity and better morale. Employers also benefit because retirement plans can attract more talented hires.

Making Retirement Planning Easier To Understand for Employees

Employers should consider one-on-one meetings with each employee to discuss retirement planning. During these meetings, employers can communicate clearly and address any concerns or questions directly.

When discussing retirement, employers must be aware that this topic can be both tiresome and complex. Therefore, it is imperative to remain engaging and straightforward. If possible, try to break complex subjects into smaller, more manageable sections. Consider avoiding specialized human resources or investment terminology, and instead use words that everyone can understand.

Warn Your Employees of the Shortcomings of Social Security

To encourage participation in retirement planning, employers may wish to warn their employees of the potential shortcomings of Social Security in the United States. Make sure they understand the downsides of claiming Social Security too early. Help them assess whether Social Security can cover their living costs during retirement, and whether there are gaps that need to be filled.

Explain Retirement Planning Options

Employees may be more likely to participate in retirement planning if they can play an active decision-making role in the overall process. This may include choosing between various retirement planning options, including:

• Income drawdown
• Buying annuities
• Cash lump sums

Learn More From Our Employee Retirement Consultants

This above highlights the importance of retirement planning and offers a step-by-step guide for individuals. It discusses various retirement plan options and emphasizes the benefits for both employees and employers. For personalized assistance with retirement planning, contact [email protected].