Helping Your Employees Fill Their Savings Gaps

A new report of reductions in state pension benefits (published by the Center for Local Government Excellence in April, 2014) should cause employers to have a new sense of urgency in helping employees participate more fully in their voluntary retirement savings (403(b) plans) and deferred compensation (457(b) plans) plans so that employees can comfortably retire at normal retirement ages.

According to this study, 24 states have changed their pension benefits, often by reducing the multiplier for each year of service and lengthening the term of average salary on which retirement benefits are based (most often, instead of using the highest three years of salary, the calculation is based on the highest five years of salary). The reductions in benefits for the 24 states that have made changes (others are contemplating future benefits reductions) that average 6.44 percent, which creates an additional gap in employee savings amounts needed to encourage timely retirement.

The study specifically says, “Given the benefits reductions, employees will need to take advantage of supplemental savings vehicles…as a result, many plan administrators are providing enhanced financial education and offering and promoting supplemental savings vehicles.” Finally, the study points out that “the impact on each individual participant will need to be calculated to arrive at the gap between retirement income expected before reform and retirement income expected after reform.”

Employees who retire at a normal retirement age versus continuing to work will result in substantial budget savings for the employer. Using one public school district’s salary schedule, we find that a long-term teacher at the top of the salary schedule will earn base salary of $71,500, while a newly hired teacher at step one on the schedule will earn $32,000. The difference of $39,500 plus some 15 percent or $5,925 in reduced fringe benefit and payroll tax savings will mean a real difference in budget dollars saved for every teacher that retires at normal retirement age.

The 403(b) regulations require that “meaningful opportunity” be provided for employees to enroll in and make changes to their contributions to the 403(b) plan. In an interview with a senior IRS staff member in the IRS Audit Division, followed with an NTSA webcast where “meaningful opportunity” was defined by the IRS presenter as “year round activity” to include an employee education featuring workshops, we began to get clarity on what the IRS means with that phrase. Among other things, the IRS is checking employee participation rates in 403(b) plans. If those rates are found to be inadequate, the IRS is asking the employer to share the employee education plan. We are also told that a low participation rate may trigger an audit. 

Actual results of three school districts that adopted a financial literacy program for their employees are shared by one financial advisor who began calling on districts after the IRS focus on “meaningful opportunity” was reported in late 2013 (and ongoing) audits. The financial advisor received agreement from key administrators of the districts that they would fully support the combination of mandatory generic financial literacy workshops, followed by voluntary “study halls” where employees could learn more. The advisor further assured the employers he and his staff would distribute a list of all of the approved product providers with contact information to make clear that each employee could select his or her provider.

District A. The program was launched in 2013, and after only four months the payroll director expressed shock that participation in the 403(b) plan had doubled in that short time. Importantly, participation increased for all of the approved product providers which the district credits to improved awareness of the program and how it works. 

District B. In a case in which the financial advisor had, before the new 2013 audit reports, already implemented financial literacy workshops at all of the district’s work sites, the district reports a participation increase of more than 500 percent. The presentations to employees also discuss how the district’s extraordinary benefits for the employees work for them, in a successful effort to improve retention and recruitment of employees. 

District C. The financial literacy/study hall program just began in January 2014. However, participation has already more than doubled. The financial advisor and his staff covered all worksites for this district, including classified staff (an often overlooked group), and recommended this approach for all districts. The district is benchmarking the success of the program by focusing on a comparison of participation rates before the launch of the program versus rates after the program began. 

The success of this type of program, according to the financial advisor, is because “the advisors have done exactly as promised, and, more importantly, the districts have gotten solidly behind the program by helping employees understand how important it is to them.”

As employers begin to offer employee financial education programs, they must carefully consider the elements of that program. One of the most important considerations is if the employer should include financial advisors to provide personal consultations to their employees.

According to a study posted on June 9, 2014, the answer is most emphatically — yes! The survey, conducted by Harris Interactive regarding the need to understand how to maximize Social Security benefits, said “workers in retirement who don’t use advisors, often find themselves slammed from both ends.” According to that study, one-third of retirees without an advisor versus only 13 percent of employees with advisors were surprised that health care costs kept them from a retirement to which they had aspired. And 33 percent of retirees who don’t work with advisors versus only 12 percent that do, discovered their Social Security benefit was less than expected. Finally, 82 percent of retirees working with advisors said they are able to do the things they want to do in retirement versus 62 percent that did not stated that they could do the things they wanted to do.

What led to these compelling statistics? Advisors spend considerable time with their clients doing the all-important calculations often called “filling the gap.” This means a thorough analysis of expected retirement income (including expected Social Security and/or state retirement system benefits) and other resources for retirement versus the actual costs an individual will face in retirement. Then, the advisor will assist clients in calculating the amount that must be saved in voluntary savings plans to fill that gap. Advisors also help their clients construct investment portfolios that are appropriate for their individual ages and risk tolerances.