Younger employees may need a little help in seeing the long-term picture
The most important thing I’ve learned about persuading younger people to start saving for retirement is that the first step is the hardest.
Once there is that “pot” of savings, however small at the start, it creates its own incentive to continue. And if there is an automatic mechanism for funding the pension contributions – such as payroll deductions or bank account transfers – then there is a good chance that it will become a lifelong practice.
What got me thinking about retirement savings – particularly as it relates to workplace benefits – was a survey from the National Institute on Aging that revealed that about 22 percent of working Canadians over the age of 50 had managed to save less that $5,000 for their retirement. A further 26 percent had saved between $5,000 and $100,000.
In today’s money, that translates as “not very much.”
Of course, retirement savings as a component of workplace benefits can be a cornerstone of the employer’s recruitment and retention strategy. A good pension plan is the first thing many of the most desirable potential employees look for in taking a job and a major reason for them to stay in the long run.
But this can seem very far off and almost irrelevant to younger workers who still believe, at some level, that they have all the time in the world. That’s why I think it makes a good deal of sense to raise the profile of retirement savings and to point out the benefits to younger and more mobile employees to build loyalty and long-term retention (among other positive effects).
I’ve learned a few things and picked up a lot of ideas from clients over the years, and I think that getting younger people on-board with retirement savings – and at the same time strengthening the bond between the workplace and the employee – boils down to three essentials: educating employees about the benefits; facilitating the process of saving; and overcoming perceptual barriers.
Here are the top 10 strategies I’ve found.
- Educate employees on compound interest. This is really the key concept that younger workers need to understand in order to come on board. It’s not so much about “putting away a little bit for retirement” as it is about “creating an investment vehicle that will pay off many times more than you put in.”
So, I looked this up, and a 25-year-old who puts aside a rather modest $100 a month will, using historical average interest rates, have $584,000 in the pension kitty by age 65. Start at age 35, and he or she will have $217,000. So, the extra $12,000 the 25-year-old put in over 10 years will result in an extra $367,000 at retirement. It’s all about getting in as soon as possible.
That’s what we need to play up to employees – especially the role of employer contributions – in employee communications, benefits reports, lunch-and-learn sessions and every other opportunity we have.
- When presenting to younger employees or orienting new hires, talk in terms of opportunity. “As a 25-year-old, you have a tremendous opportunity to buy substantial future income at a much lower price than people in their forties…” Tell them, “You’re young, make the decision once and never worry about it again. Just do it!”
3. Don’t leave money on the table! If you are lucky enough to have an employer-matching pension plan – in other words, the employer will match your contributions up to 3 percent of earnings, or 4 percent or sometimes even more – go for the highest contribution you can, to make sure you are getting the maximum employer matching.
4. Make your pension plan visible. Talk about retirement savings in meetings. Provide regular reports. Communicate the concept that “everyone is doing it” and that “the smart money is on retirement savings.” Provide regular progress reports and make data accessible. It’s important to keep plan members informed and aware of where they stand in terms of current balance and progress.
5. Play up the real-time benefits of retirement savings. For example, maximizing the tax advantages of using all the room in a Registered Retirement Savings Plan (RRSP) should be a no-brainer. Not doing so is essentially leaving money on the table, and employees need to know this. Note that RRSPs that are not “locked in” until retirement age can be used as an emergency fund at any time in the future (although they are taxable when funds are withdrawn). RRSPs can also, under some circumstances, be used to help finance a first home (as long as the money used is put back in the plan later).
6. Enroll new employees in the pension plan as the default option. Automatically enrolling employees in your retirement plan dramatically increases participation because it removes the need for them to take the first step. Employees must opt out rather than opt in, which makes participation much more likely.
7. Play up the advantages of “set it and forget it” automatic contributions to retirement savings. The same idea can be applied to increasing contributions when there is a raise in pay. Increasing the automatic deduction at that point means using money that you never even see.
8. Provide financial planning education. Employees often lack basic financial literacy, which leads to inaction. Workshops, calculators, and lunchtime talks by financial planners and regular reports on pension status can help build confidence and spark engagement.
This is an area where your benefits consultant can help. We have people who will put on education sessions for employers or even consult one-on-one with plan members. And the carriers we deal with have apps that give plan members tools to plan their future requirements, see their options and make choices about plan contributions.
9. Talk in terms of taking full advantage of current savings opportunities and maximizing future income. Provide financial planning resources or consultation to allow employees to feel that they’ve “got it covered” and are doing everything they should be doing in terms of retirement savings.
10. Make the future feel real to employees. Tools that show projected retirement income, lifestyle scenarios, or personalized savings gaps make the future concrete. When leaders talk openly about retirement planning, celebrate milestones, and normalize financial conversations, employees feel supported and more motivated to participate.
I have seen number of surveys over the years that asked people what their biggest financial regret was. And the one of the top answers is always that they regret not starting to save for retirement at an earlier age.
We, as benefits professionals, have an opportunity and an obligation to help plan members understand the value of their pension plans, how to maximize their long-term benefit, and how to leverage relatively modest contributions today to secure life-changing income in the future.
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I really appreciate comments, ideas, suggestions or just observations about the blog or any other topics in benefits management. I always look forward to hearing from readers. If there’s anything you want to share, please email me at bill@penmorebenefits.com.
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