Retirement savings is among the largest concerns of U.S. workers, a concern that can greatly impact employees’ financial well-being, productivity and retention.
Two specific strategies can boost employees’ participation in retirement savings plans and build their nest egg and help employers alleviate these concerns, say financial advisors.
And such efforts couldn’t come soon enough for HR leaders eager to retain workers in a tight labor market.
Employees’ concerns about their ability to retire jumped to the No. 2 spot last year on things keeping workers up at night from the No. 5 spot in the previous year, according to a survey of 4,049 full-time U.S. employees by Mercer, an employee healthcare and investment consulting firm that operates as a business of Marsh McLennan.
Related: Here’s how inflation is taking a toll on retirement
In addition, an increasing number of states—such as California, Illinois and 14 others—now require certain employers to offer retirement plans to their workers. As a result, employers would be wise to explore not only offering retirement savings plans but offering plans that will be effective in boosting workers’ savings, especially those of blue-collar employees.
Blue-collar workers, including those in construction, manufacturing, hospitality and other industries, comprise approximately 14% of the US workforce and are in short supply. Offering effective retirement savings plans will not only help attract and retain these workers but also white-collar employees, experts say. Here are two strategies to consider:
- Automate payroll deduction increases
The Secure 2.0 Act of 2022, which was signed into law late last year, calls for automatic enrollment in 401k retirement plans with initial payroll contributions of 3% to 10% unless an employee states they want to opt-out.
Employers that launch a new retirement plan after Dec. 29, 2022, will be required to make automatic payroll deductions for their retirement plan beginning in 2025. Companies that have been in business for less than three years and employers with 10 or fewer employees are excluded from the requirement.
But Craig Reid, president of Marsh McLennan Agency’s retirement planning services business MMA Securities LLC, believes all companies, regardless of size and age, should consider automatic payroll deductions for the retirement savings plans they offer employees.
“What we find is that north of 85% of employees who are auto-enrolled in a retirement plan stay in their plan. But for plans that don’t have auto-enrollment, that number is significantly lower,” says Reid.
That’s why he recommends auto-enrollment, especially for organizations with blue-collar workers or a diverse workforce. A Senate report on Secure 2.0 also points to dramatic increases in the participation rate of younger, lower-paid employees and workers who are minorities with automatic payroll deductions for retirement savings plans.
Reid also advises companies to start with automatic deductions of 8% to 10% and then escalate it each year by 1% to 2% until it ultimately reaches a payroll deduction of 15%.
Most plans, however, start with automatic deductions of 3% because they believe there will be significant resistance from the workforce. Reid says that resistance rarely materializes. His strategies for ratcheting up payroll deductions include timing annual percentage increases around yearly bonuses or raises to minimize the impact and making small boosts.
“Increasing the amount by 1% to 2% per year is not a life-changing amount,” says Reid.
2. Consider portable retirement savings plans
Portable retirement savings plans, the second strategy for employers to consider, are similar to employer-sponsored 401k plans in some ways but not identical, according to an IRS report.
Like 401k plans, they rely on payroll deductions for depositing funds into an employee’s retirement savings account, which could include investments in mutual funds, exchange-traded funds (ETFs), or other types of investment vehicles.
One difference, however, is that they use payroll deduction IRAs. And this IRA can travel with employees as they change jobs, with new employers redirecting a portion of an employee’s pre-tax income or after-tax income to the designated payroll deduction IRA.
Under a 401k, employees are required to either transfer or roll over their retirement funds out of their 401k and into an IRA, to roll it into their new employer’s 401k plan or to withdraw the money altogether. In some cases, a former employer will allow an employee to keep their retirement funds in their existing 401k fund, but the employee will not be able to make further contributions from their new employer.
“We’ve seen a surge in companies switching to a portable plan from their 401k. For employers, it’s less expensive to operate and it’s cheaper for employees,” says Laurie Rowley, co-founder and CEO of portable retirement savings company Icon. “Every time a worker changes jobs they don’t have to roll over their plan. This plan is better for blue-collar workers who frequently change jobs.”
Although 401ks tend to have a wider selection of investment funds to choose from, the 401k investment fees and other fees can be higher for employees compared to a payroll deduction IRA that uses an ETF index fund, says Rowley. And that puts more money back into employees’ retirement savings, she added.