How a financial wellness program can help attract employees and retain them through 'retirement readiness'

“Retirement readiness” is different for everybody, depending on age, health, biological gender, income, savings, expenses and many other factors. At the most basic level, it means reaching a point where you have accumulated enough money to cover all the anticipated costs of retirement through the remainder of your life expectancy.

The lack of retirement readiness is a problem shared by most employees across America, regardless of their employer or company-sponsored plan. Amid this environment, both 401(k) and 403(b) plan sponsors share the goal of wanting to improve the retirement readiness of their participant populations.

Competitive market

In today’s competitive hiring market, employers need to offer benefits packages that not only attract potential employees but encourage them to stay long term. From a financial standpoint, that means helping people reach a state of readiness for a retirement that’s likely decades in the future, while simultaneously ensuring they have enough money to pay their bills today.

If you can’t afford the rent for your apartment or don’t have enough money to make needed repairs to your car, how much will you care that your saving habits should put you in a good position to retire 30 years from now? So, my firm encourages employees to save in the company retirement plan, but responsibly.

I often find that employees only contribute to a retirement plan up to the level of the employer match, which tends to stop at 5% or 6% of the paycheck. Taking advantage of this match is important but it should only be a first step. Too frequently, employees who focus on contributing up to the match never increase that contribution over time.

If an employee contributes only 6% of their paycheck, even if they receive a match of 50% on that 6%, their overall contribution to the retirement plan is 9%. Unfortunately, that just isn’t enough to realistically become retirement ready.

The U.S. Government Accountability Office has indicated that contributing between 12% and 20% would be appropriate for most people to eventually become retirement ready. That said, there’s also a danger of contributing too high a percentage too soon, because it could cause a person to panic, feel like they don’t have enough money to pay their bills, and then stop contributing entirely.

I encourage people to contribute what they can afford initially, even if it’s only 1% to 3%, and then increase the allocation every time they get a raise, which would typically be once per year. That way, the increase won’t make a greater dent in their take-home pay, which could be discouraging to people.

Evaluating demographics

When consulting with an employer, we start by evaluating the employee plan demographics to get a sense of age, biological gender, marital status, account balances, etc. In our initial employee meetings, we spend time not only talking about the plan and importance of saving toward retirement, but also our employee wellness survey.

This survey data provides a real sense of the financial stress the employees are under and what we can do to address it. Campaigns are then developed around the elements causing the most stress, including on-site and virtual education sessions designed to meet the varying needs and preferences of employees from different generations such as Generation Z, millennials, Generation X and baby boomers.

Offering solutions based on biological gender is critical as well, because women tend to live longer than men and have traditionally been underpaid by comparison. Employees are taught the importance of saving for retirement, but also how critical it is to budget, manage debt and credit scores, and prioritize income goals based on their specific circumstances.

Plan types and designs must also be factored into the equation, as well as organizational culture. Nonprofit organizations are mission-based and accordingly have a natural concern for the well-being of their people. In contrast, while for-profit organizations may be more focused on financial results, a good company culture often drives the attraction and retention of employee talent. Also, employers who are focused on ESG (Economic, Social and Governance) factors in their corporate culture theoretically have a greater concern for their employee’s well-being.

Organizations that provide financial counseling are generally viewed more favorably by their employees, because they believe the company has a genuine interest in their well-being. Furthermore, employees with lower levels of financial stress have been shown to be more productive at work.

According to a study by Salary Finance, 48% of people are worried about money and these people are 8.2 times more likely to have sleepless nights. Such stressors are 4.9 times more likely to affect the quality of their work, which results in about 3.4 hours in productive work time lost per week as people attempt to address their money worries.

Plan options

From a plan-option standpoint, there are important regulatory differences between 401(k) and 403(b) plans. 501(c)(3) nonprofit employers have more choice in the types of defined-contribution plans they can offer since, unlike for-profit employers, they are eligible for both 403(b) and 401(k) plans. While the basic limits of each under the tax code are similar, the nuances of plan design can make all the difference in deciding between the two. In contrast, for-profit employers and nonprofits that aren’t covered under 501(c)(3) would not be eligible to sponsor a 403(b), and a 401(k) or other 401(a) plan would be a better fit.

Many nonprofit employers elect to offer two plans to their employees: 403(b) salary-deferral arrangements and a 401(a) nonelective contribution plan. A 403(b) plan with a deferral-only feature has tangible value since 403(b) plans are not subject to the infamous ADP test that 401(k) plans must endure. This means plan participation and contribution levels will not have any effect on the salary-deferral levels that other, high-paid employees may elect to contribute to the plan.

The 403(b) plan is then often paired with a 401(a) plan to provide a nonelective contribution, which is offered as a basic benefit every employee receives, regardless of their participation in the salary-deferral portion of the plan. While the 403(b) plan could also offer such provisions, the 401(a) plan can have more restrictive eligibility provisions and even provide benefits based on various criteria, such as higher contribution rates for employees with longer service.

Alternatively, if the employer only wishes to establish and manage the administrative responsibilities (and costs) of one plan, then a 401(k) plan with more restrictive eligibility provisions, or a 403(b) plan with minimal eligibility provisions, could be a better fit. But this only scratches the surface of possibilities that should be considered.

Committed leadership

A significant challenge in my role as a consultant to companies on financial wellness benefits is trying to gain the attention of participants. I find that the employer can be the biggest roadblock or best partner in this endeavor. Some employers just set up a benefit plan because they feel like they’re supposed to, but they may lack the necessary focus required to implement a successful financial wellness program.

Fully committed company leadership can make a significant difference. When an employee receives an email from their CEO explaining that the company is offering group educational sessions about financial wellness with an external consultant, and one-on-one appointments can also be made with that person, they’re much more likely to pay attention than if the email comes from me.

While attending those group sessions is a good first step, I feel that problems are really identified and addressed in the follow-up individual meetings. This is because when coworkers aren’t nearby, people tend to worry less about asking a question they fear maybe a “dumb” question or revealing difficult personal financial circumstances. Sometimes, I’m able to help solve money problems they might be having, and other times I’ll recommend that the person speaks directly with a financial advisor about them.

Gauging success

The most effective way to determine the success of any financial wellness program is through confidential surveys with aggregated data. Employees need to understand that the information is strictly confidential and their personal answers will not be shared with the employer.

It’s important to conduct a baseline survey to learn about the initial financial wellness of employees prior to offering educational sessions. The more questions that you ask and they answer, the better your baseline will be. It can be very helpful for company leadership to know if, for example, 10% of their employees have declared bankruptcy in the last 24 months, 52% of employees don’t have $1,000 saved up for emergencies or the average employee credit score is below 650.

Typically, providing the education to help employees feel more financially well would pay for the cost of the program several times over, thanks to their increased productivity and focus as they become less distracted and anxious due to financial issues.

I would encourage companies to treat the survey data as a roadmap for helping employees reach a better state. It doesn’t happen overnight. You need to offer group educational sessions, which trigger one-on-one meetings and gradually result in behavioral changes. The process is data-driven, similar to health and wellness programs, with the improvement revealed by subsequent surveys and likely being well worth your time and money.

Robert Massa, ChFC, CEBS, AIF, CPFA is Managing Director, Houston Market / Retirement Practice Leader for Qualified Plan Advisors.