Inflation, market volatility are hurting retirement optimism. What can HR do?

Recent economic volatility is causing a myriad of issues, from high prices at the gas pump to recession fears. And how employees feel about their long-term savings is no exception: Employees are losing confidence checking their 401(k) balances in a tumbling market, while rising inflation is changing their financial priorities, leading some employees to decrease their retirement contributions.

In short: It’s not the most optimistic time for employees’ retirement strategies.

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“There have been a number of surveys showing that retirement confidence has declined recently, which is understandable as consumer sentiment overall recently reached a historic low,” says Michael Majors, vice president of HR solutions sales at HR and benefits services firm Paychex. “In addition, many employees are experiencing today’s major cost-of-living increases for the first time in their careers and are unsure how to think about retirement savings during a period of high inflation.”

In a March survey of 1,000 adults from Voya Financial, the majority of respondents (66%) said they are worried about how inflation will affect their ability to save for retirement, a number even higher for younger workers: 73% of millennials and 74% of Generation X are worried about inflation’s effect on their retirement savings. Meanwhile, nearly half (43% of respondents) said that because of inflation, they have had to tap into finances they previously had set aside for retirement.

Inflation rose 8.6% year-over-year in May, the highest inflation rate since 1981, according to the U.S. Bureau of Labor Statistics.

Generally speaking, when the cost of living increases significantly, employees become more likely to decrease or drop retirement contributions, says John Lowell, an Atlanta-based partner with October Three Consulting, a retirement plan advisory firm.

Pay increases, at least in the short run of this inflationary environment, are not keeping up with inflation. They’re not coming close,” he says. “That means, assuming that they can meet their basic needs, people have less discretionary spending power. Employees are cutting back somewhere, and it’s probably not on the basics of life, like their groceries or mortgage.”

Usually savings, retirement investments or health savings account funding tend to be low-hanging fruit for cutbacks.

This begs the question: What role do HR and benefits managers play in supporting employees during tumultuous financial times? And how can they best convince employees to stay the course when things aren’t looking great with retirement savings?

Communication, education and continuing with financial resources and benefits all play a role, experts say.

Employers—in particular, HR and benefits executives—are in a unique position to offer guidance and leadership with finances and retirement plans during this volatile time, but many are often unprepared for it. Industry experts suggest that HR and benefits managers should first and foremost step up and provide messaging to employees to keep them updated—and calm—about their fluctuating retirement accounts.

“During times like this, it’s important for employers to communicate that the most effective strategy for employees to stay on track with retirement plans is to stay the course with their contributions,” says Paychex’s Majors, adding they can remind employees that the stock market and retirement balances regularly ebb and flow, but balance out in the long run.

An important message “is that short-term market and financial volatility will happen over the course of an employee’s career, but long-term trends ultimately don’t change,” he says.

Employers that offer employer-sponsored retirement accounts should continue to tout them and explain their merits, even during economic downturns, Lowell agrees.

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“If I were a CHRO or a SVP of human resources, particularly if I had a pretty good retirement program, I’d be communicating the [offering] at least quarterly, and probably much more often than that. Just constant messaging to make people feel really comfortable with it. And a lot of what I would be saying would be along the lines of ‘Stay the course.’ ”

Looking at the big financial picture

Timothy Flacke, executive director and co-founder at Commonwealth, a Boston-based financial nonprofit, says it’s not just the retirement situation, but financial uncertainty as a whole that needs to be addressed by employers.

“It’s been our experience that most workers—most people—get that contributing to their retirement plan is prudent,” he says. “The issue is not intent or understanding; it’s all the competing pressures.” The pandemic, for instance, has dampened financial security with lost jobs, reduced hours, health scares (and associated costs) and other uncertainties.

Hourly workers often bear the brunt of that insecurity, he says. Even before the pandemic, a Commonwealth survey found that 81% of survey respondents said financial insecurity was a major concern. “Many of these workers did not have confidence a traditional leave-the-workforce, leisure-focused retirement was in their future anyway,” he says.

“It’s natural for responsible employers to worry if their workers stop contributing to retirement plans,” Flacke says. “But savvy employers will see the larger picture—that many workers face lots of financial pressures—and focus on ways to support employees in managing financial stress.”

Benefits like financial wellness programs, which can offer tips to employees on budgeting, saving money and more, can alleviate employee stress and help with strategies for paying debts, allocating for expenses and saving for their post-work years. Emergency savings accounts can give employees an easy way to put away money while boosting their financial confidence. Those programs can also improve retirement savings, Flacke says.

In addition to these offerings, Majors adds, employers may benefit from bringing in a financial adviser to provide regular updates and perspectives. “It’s an important step that employers can take so that employees have the knowledge they need to make informed decisions.”

“The current employment landscape has fundamentally changed the dynamic between employers and their employees. Those employers that don’t recognize that financial wellness really matters to today’s workers who are expecting help and support to navigate these turbulent times could be in for a rude awakening when it comes to retention,” Majors says. “It’s all about helping employees feel empowered so that they can plan responsibly for a sound financial future.”

Meanwhile, helping workers get more money back in their pocket can also help employees’ financial situations—and their ability to stay the course in retirement. Salary increases and reimbursing employees for childcare, pet care or other expenses could help address rising inflation concerns and prevent employees from decreasing their retirement contributions.

Showing compassion

There’s another strategy, insiders say, that cannot be overlooked when supporting employees: empathy and understanding.

“Employers should communicate that they understand the emotional toll that worries about retirement savings take on employees and offer benefits to help them with this important consideration,” Majors says.

Flacke agrees, saying lecturing employees about the importance of savings isn’t going to improve employees’ situations, given the context.

“If your spouse just saw his hours cut through the pandemic, or you’re paying nearly twice as much to commute because gas prices are spiking, another finger-waggy message about saving for the long term is unlikely to help,” he says. “Smart employers will communicate with empathy, in a way that recognizes the pressures people feel and reminds workers to see the longer-term, bigger picture, and [educates them about] the social networks they can tap for support. Our research has found this is the way workers who feel confident about their finances think.”

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Kathryn Mayer
Kathryn Mayer is HRE’s former benefits editor and chair of the Health & Benefits Leadership Conference. She has covered benefits for the better part of a decade, and her stories have won multiple awards, including a Jesse H. Neal Award and honors from the American Society of Business Publication Editors and the National Federation of Press Women. She holds bachelor’s and master’s degrees from the University of Denver.