Year-end bonuses: Gifts that keep giving
Maybe it’s the overwhelming spirit of the season, but spending that bonus on a big gift removes the real benefit.
It’s funny, the law of entropy doesn’t seem to apply to business productivity. Rather than moving towards chaos, business productivity appears to move towards increased efficiency. You might remember the term “just-in-time manufacturing,” for example.
We see a similar trend with consumers. For them, it’s called “instant gratification.” Whether it’s drive-thru service or next-day delivery, we find buyers gravitating towards a “get it now” mindset.
This rises to prominence every year around this time as those year-end bonuses arrive. Recipients are thinking about converting those newfound dollars into a long-desired good for themselves or others. Not that there’s anything wrong with that.
Related: 5 things to keep in mind about holiday bonuses
But it’s certainly not the optimal decision in terms of maximizing one’s financial benefit. Maybe it’s the overwhelming spirit of the season, but spending that bonus on a big gift (or even lots of tiny gifts) removes the real benefit of this unpredictable windfall. Employees might be better off using that bonus to ensure a brighter future rather than a mere flash in the pan today.
According to the Federal Reserve Board, more than half of American workers, no matter their age, feel their retirement savings isn’t on the right track. And yet, they spend that year-end bonus like it’s burning a hole in their pocket.
Truth be told, there’s a lot of room for improvement in our nation’s retirement savings rate. Seven out of eight workers fail to contribute the statutory maximum. Now, you can say this is so because people live paycheck to paycheck, but the year-end bonus isn’t the paycheck. It’s exactly what is says it is—a bonus.
If some or all of that annual bonus can be devoted to retirement savings, imagine how much closer it would bring employees to feeling they are on track for retirement. Yet, the incessant drumbeat of seasonal sales reverberates daily within their ears from sometime before Thanksgiving to the new year. That siren is difficult to ignore.
How can plan sponsors help set plan participant on the right foot this holiday season?
Take a page from Madison Avenue. Sell the idea in all company communications. Begin preparing employees to save their year-end bonus directly into their retirement plan as early as the end of third quarter 401(k) statements. Then constantly include information on this in any employee correspondence.
In addition, what if companies told employees they had an option to change their withholding and deferral preferences for any bonuses? This gives the employee an active chance to do what those company communications suggest.
Shift reporting to emphasize the current growth of all previous employee contributions, including both investment growth as well as company contributions (and the growth that comes from that matching).
Here’s another twist: In encouraging employees to choose a savings option, we break the status quo generated by the normal opt-out provisions common in today’s 401(k) plans.
This offers a greater lesson for plan designers: No one size fits all.
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