We all know that as employees progress through their careers, their investment portfolio mix should change. In addition, retirement readiness means they need to take advantage of financial vehicles outside of the typical personal savings and 401(k) plans — options such as Health Savings Accounts (HSAs), life insurance, and long term care insurance.
As it stands today, expecting individual employees to be able to understand all the educational materials can be a challenge. As an employer, you need to give them the context behind “why” these tools are important to them.
For instance, why HSAs? Shifting income to HSAs allows employees (and retirees not yet eligible for Medicare) to offset the costs in a high-deductible health plan without having the money taxed by the federal government. They can also roll the money over year to year, unlike a Flexible Spending Account (FSA). Why life and long-term care insurance? These can be valuable tools because employees and their dependents won’t have to dip into their savings in the event of a catastrophic injury.
Another example of missing the full picture is not taking advantage of employer contributions. Even within the typical defined contribution setting, employers often presume employees are simply leaving “free” money on the table if they don’t take advantage of their company’s 401(k) match. To the employer, the match is free money given to an employee to supplement their retirement savings. But it isn’t free to the employee, who has to contribute more from his or her take-home pay to earn the match. Rather, it’s an incentivized savings program that needs to be communicated as a valuable retirement savings tool.
If employees are struggling to find the time to educate themselves or understand retirement basics such as taking advantage of the company match incentives, then employers should explore mechanisms to do it for them. Applying attributes of a defined benefit program to a defined contribution plan helps employee understand the income needed to promote adequate savings for retirement. These attributes include thinking in terms of income replacement ratios and lifetime income.
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