The numbers show that Americans are poorly—if at all—prepared for retirement. And yet nearly a fifth of Americans could be at or past retirement age by 2030.
Because of this, plan sponsors are becoming increasingly concerned about their role in getting their workers ready for an eventual departure from the workplace.
Although they have experience that younger workers don't have, older workers cost employers more in salary and benefits expenses.
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In addition, there's the question of how younger workers will find jobs if older workers don't leave the workplace.
Since a lack of financial preparedness for retirement presents a substantial obstacle to older workers' being able to leave their jobs behind, plan sponsors are exploring different options to make retirement benefits more effective.
To that end, a white paper from Joel Lieb, director of SEI Institutional's defined contribution division, explores five questions he says plan sponsors should be asking about whether their plans provide workers with meaningful retirement income.
Here are the five questions sponsors should be asking:
1. What is the objective of our DC plan?
Simple, right? Not so fast. Is the plan intended to serve as the primary source of income in retirement for employees?
To act as a supplemental savings program for employees, maybe along with a pension plan in which employees are still accruing benefits?
Or maybe it's just there to provide a low-cost, low-risk competitive addition to the company benefit program.
Depending on the answer, sponsors and their fiduciary committees may decide to add a retirement income feature to the plan.
2. What are the demographics and behaviors of our employees?
Sponsors who really want their retirement plans to be effective in helping employees save enough to retire on time have to consider the demographics and behaviors of their employees.
Otherwise it will be all too easy to fail them as they struggle with issues like student debt—mostly millennials—or caring for aging parents while paying for their kids' schooling, as many GenXers and younger boomers are doing.
They'll have different needs, and their savings patterns—or loan-taking—will vary.
In addition, sponsors should consider whether their plan actually provides employees close to retirement with large enough balances to live on during retirement. If not, it's time to consider why it's not working.
3. Do we want employees to remain in our plan after they retire?
Participants can remain in plans for more than 30 years after retirement, adding scale and potentially lowering fees, but ongoing maintenance costs can outweigh the benefit for plan sponsors.
In addition, plans that allow employees to remain could become a drag on human resources departments and/or expose the company to increased liability.
Sponsors need to determine if they are better served focusing on in-plan or out-of-plan solutions.
4. If we provide a retirement income option, does it need to provide "guaranteed" income?
Guaranteed income offers greater peace of mind for employees, but can be more expensive to provide, depending on the options available.
It can also make plan administration and education more complex, as well as necessitating greater oversight by the plan investment committee.
On the other hand, income options that are not guaranteed are generally investment-based and may not meet employees' needs.
Sponsors have to decide which type of plan makes the most sense for their employees.
5. Do we already have a retirement income option in our plan?
A recent SEI poll found that 81 percent of plan sponsors now offer target-date funds.
A better understanding of how they work, and what their post-retirement objectives are, should be on sponsors' lists to determine whether TDFs are meeting their employees' income needs in retirement.
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