Does financial wellness education increase retirement plan participation?

As any good advisor knows, a successful retirement plan requires more than a robust investment menu. Plan participation is essential, but also one of the biggest challenges.

Financial wellness education can increase participation, bolstering plan participants’ chances of a successful, on-time retirement. In turn, this helps plan sponsors by reducing costs associated with retirement-age employees.

With American adults experiencing increased financial stress during the pandemic, plan sponsors and participants are especially interested in financial wellness benefits that can help reduce financial stress and prepare them for economic uncertainty.

The costs of delayed retirement

Employees over age 65 face almost double the health care costs of those between the ages of 45 and 54, translating into higher costs for employers offering health care benefits. Employers with an aging workforce are especially vulnerable to these higher costs.

A 2019 Fidelity Investments study found that 73 percent of employers reported increased costs when employees delay retirement; 31 percent said it inhibited strategic planning; and 21 percent reported lowered productivity.

It can cost employers $50,000 per employee per year for a one-year delay in retirement, Prudential found. For employees who delay two or more years, the cost gets even higher.

The post-coronavirus economy could force even more aging workers to work longer because they stopped contributing to their retirement plan or dipped into their retirement savings, experts say.

Impact of delayed retirement

As a result of the pandemic, 33 percent of all workers have already taken a loan and/or a withdrawal from their qualified retirement account, or plan to do so, according to a Transamerica Center for Retirement Studies survey released in December. Additionally, only 27 percent of survey respondents said they have a written financial strategy for retirement.

Working longer is not a financial strategy, especially because health problems or other unforeseen circumstances can arise.

Delaying retirement was a growing trend even before the pandemic.

• Twenty percent of seniors at or above 65 are still working and this number is projected to increase over the next several years, even among those 75 and older.
• In a survey of those nearing retirement, the Insured Retirement Institute found that 6 out of 10 seniors plan to work past 65 and 1 out of 4 plan to work until at least 70.
• According to a study published last year by the Transamerica Center for Retirement Studies, 54 percent of workers plan to either work past age 65 or never retire at all.

This trend has consequences for employers, who incur higher health care costs with older employees and lose promising younger employees who leave because of lack of advancement opportunities. As boomers work longer, younger employees are not able to advance in their careers, according to a recent USA Today and LinkedIn survey. 

How financial wellness programs can help

To help plan participants prepare for retirement, financial wellness programs can teach:

The value of participating in company 401(k): Not that long ago, those headed into retirement could count on getting a company pension. Today, far more employers offer 401(k) benefits instead. However, the majority of 401(k) investment decisions must be made by participants who may not have the financial knowledge to make the best choices.

Case in point: A study by Financial Engines found that 25 percent of employees do not take advantage of company matching, leaving $24 billion on the table each year. But financial wellness education can improve this statistic.

How to make up for retirement savings deficits: More than half (57 percent) of American workers have no retirement savings. According to the EBRI, this means that Americans have saved $4.3 trillion less than they should have. With the average lifespan almost a decade longer than it was in 1960, Americans should be saving more, not less.

A good financial wellness program should increase retirement plan participation and savings. One financial wellness case study shows a 15 percent increase in retirement plan participation over a 12-month period.

How to prevent retiring with debt: In addition to the lack of savings, Americans also carry a lot of debt. According to The Federal Reserve Bank of New York, people ages 45 to 54 have $134,600 in debt and those ages 55 to 64 have more than $108,000 in debt.

A financial wellness program can help participants manage their debt better. Research on the impact of financial wellness shows a 27 percent increase in users that pay their credit card bills in full each month.

Benefits advisors should help plan sponsors establish a financial wellness program that is individualized, looks at financial wellness from many angles, and targets employees during life events, when they are most likely to need the information. Financial wellness education can increase plan participation and help participants retire on time with a real plan of action, which benefits everyone.

Kris Alban is executive vice president of iGrad, a San Diego-based financial technology company that provides artificial intelligence-powered financial wellness solutions to employers, financial institutions, colleges and universities.