For most of us, the end of the year is a time for reflection. As we spend time with family and loved ones around the holidays, it’s natural for us to reflect on our lives and work over the last twelve months.
Plan sponsors are no exception. In fact, over the past several weeks, I’ve heard and seen sponsors echo similar concerns as they take stock of their work and begin planning for 2017. Things like, “Are my employees saving enough for retirement, and how can I tell?” “At what age will my employees be ready to retire?” and “If my employees are ready to retire, do they actually know it?”
These thoughtful questions indicate a focus on retirement readiness, which is certainly not a new concern. But what’s different about the comments I’ve heard from sponsors lately is an angst around how retirement readiness affects workforce management. It’s no wonder—with 10,000 baby boomers retiring each day, there’s a generational shift that’s bringing workforce management issues to the forefront.
A different perspective
While defined contribution plans are not workforce management tools, they certainly can be designed in a manner that benefits both your employees and organization. You can use your DC plan to help the bulk of your workforce be ready to retire when they want to and maybe when you want them to. Achieving that design goal might require a different perspective: Instead of focusing solely on the present, incorporate a future focus by considering how today’s plan design inputs might affect tomorrow’s outcomes.
Let me explain: When it comes to inputs, sponsors have made significant plan design improvements over the years. Automatic enrollment, automatic increase, employer contribution, and target-date fund defaults are all on the rise—and that’s great news!
But the big question is, do your present inputs lead to your future goals? To answer, I suggest you take a “future perspective” by addressing these two important questions:
- What percentage of an employee’s income do you feel is an appropriate replacement ratio target at retirement? (At Vanguard, we use 75% as our default replacement ratio.)
- What would you consider to be the ideal retirement age for the average employee in your plan? (Vanguard uses age 67 as our default.)
Once you and your committee have answered these two key questions, consider working backward or using “reverse engineering” to align your present plan design with your desired outcomes. The ultimate goal: A strong, smart plan design that gets participants into the plan—at a sound default rate with automatic savings increases—and into a low-cost, balanced default investment such as a target-date fund.
Savings boosters: Plan design, planwide events
Having a strong, smart plan design need not cost you an arm and a leg. Some Vanguard clients get their participants to our recommended savings level (9%, 12%, or 15%, depending on income) by making large employer contributions, whereas others have a small match commitment and get participant savings up via automatic enrollment and automatic increase.
Why is this important? Because a strong, smart plan design that promotes savings is probably the strongest weapon in your arsenal when it comes to helping ensure that your participants are ready to retire at a time that’s best for them—and best for your organization.
Planwide events are another key to strong savings for this simple reason: You can have a strong, smart plan design yet still have low overall plan savings if too many participants opt out or are stuck in an old plan design with, for example, a low default rate and no automatic increase. A planwide event about every three years—such as sweeping quitters and undersavers into the new plan—can have a tremendous effect on participation and savings. One client used a planwide event and had these outstanding results: Participation went from 75% to 95%, and participants saving at or above the company match rose from 59% to 91%!
One of the reasons I’m emphasizing the importance of savings is the fact that our data show that most participants—almost two in three—are not saving effectively for retirement. They need your help. If your employees want to retire at age 62, and you want them to retire at 62, increasing savings can be instrumental in helping them achieve retirement readiness by age 62.
As I reflect on this year, I’m excited by what the future holds for plan sponsors and participants alike. We have some wonderful tools and projects in the works for 2017, and I look forward to sharing them with you in the coming months. Working together, I’m confident we can devise a plan that gets your workforce retirement ready when it’s right for everyone.
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments (stocks) to more conservative ones (bonds and short-term reserves) based on its target date. An investment in a target-date fund is not guaranteed at any time, including on or after the target date.
- The experiences of Vanguard clients described herein may not be representative of the experiences of other Vanguard clients and are not a guarantee of future investment performance or success.