Retirement plan re-do: 4 ways to redesign 401(k)s to reduce employee financial stress

A recent Harvard Business Review article reported that 80% of all businesses’ employees are feeling financial stress. For 27% of those employees, the stress they feel is reported as “high or overwhelming.” The article goes on to explain that employee financial stress is affecting your profitability. In fact, it describes this stress as “lethal to your bottom line.”

One way businesses can reduce that stress — as well as its impact on their bottom line — is to support employees in their financial planning. Recent stats show that only 56% of US workers are currently participating in a retirement benefits plan. Of those, another 56% say they are behind in retirement savings, with 37% saying they are “significantly behind.”

The following are some steps employers can take to support their employees in their retirement planning.

Step #1: Implement an opt-out retirement plan

With 78% of Americans reportedly living paycheck to paycheck, many employees will feel contributing to a retirement account is out of their reach. However, an opt-out retirement plan, which automatically enrolls a new employee unless they request otherwise, can help employees test-drive retirement savings to gain a true understanding of its impact.

Opt-out retirement plans typically commit employees to a small monthly contribution, which is usually 3%. Many opt-out plans also allow employees to withdraw the account balance within 90 days of their first automatic contribution if they find it doesn’t work for them.

The downside of opt-out plans is they typically don’t establish a contribution percentage that will make a big difference over time, with most retirement experts recommending contributing at least 15%. Opt-out plans can address this shortcoming by increasing the contribution percentage annually until it reaches a recommended amount.

Opt-out plans also have the potential to build excitement for retirement savings by showing employees how their contributions can expand. This is especially true if the plans experience high performance during the employee’s first few months of involvement.

Step #2: Offer matching contributions (and clearly explain what that means)

A recent report by the Society for Human Resources Management (SHRM) revealed that 92% of employers match employee contributions to retirement accounts, but that employees often do not take full advantage of the matching available to them. The report goes on to explain that 25% of employees are not contributing in a way that earns the maximum match, with the average employee losing $1,336 per year as a result.

Companies that offer retirement matching can encourage employee participation by clearly explaining the benefits they offer to employees. The $1,336 annual loss mentioned above, for example, could compound to nearly $43,000 in 20 years according to the SHRM report. When employees understand how a small increase in their retirement contribution can significantly increase their return over time, they may be more inclined to increase their participation to take full advantage of employer matching.

Step #3: Provide educational resources on financial health

Adding financial health resources such as workshops or seminars on financial matters to your company’s employee wellness program is another step that can support retirement planning. This can help employees understand how earning, budgeting, and debt management can contribute to more effective retirement planning.

Companies can also consider providing employees with access to financial advisors in the same way that companies are offering mental health counselors. This assists employees in identifying their retirement goals and understanding the steps they will need to take to achieve them.

Financial education can also explain how catch-up contributions can help retirement planning for those over the age of 50. These contributions allow employees who are nearing retirement age to go beyond the typical standard limit to increase account holdings.

Step #4: Make available a variety of plan options

Even small companies are bound to have a variety of different investor profiles represented among their employees. By offering a wide variety of plan options, employers can help to ensure employees will find a plan that suits their needs.

Risk tolerance is one of the factors that contribute to an investor profile. Offering plans that satisfy the full spectrum of risk tolerance, from conservative to aggressive, is important, but employers should also consider the time horizon of their employees and offer plans that meet the needs of both young and old employees.

Related: The power of auto-enroll (& auto-sweep): What moves the needle in retirement savings

The financial stress your employees bring to the office has an impact on their effectiveness, but supporting them in their retirement planning can help provide ways to reduce that stress. Every step you take to increase understanding of and participation in retirement plans has the potential to improve your employees’ peace of mind and, subsequently, your company’s overall success.

Aaron Cirksena, founder and CEO of MDRN Capital, which is revolutionizing retirement planning by offering a comprehensive range of services, including income planning, investment management, tax planning, healthcare, and estate planning, all with a greater degree of effectiveness compared to traditional providers.