Does Your Company Need To Strengthen Its Employer-Provided Retirement Program? Why? How? What Could Happen If You Don’t?
So, you have a solid 401(k) savings plan. It’s competitive in your industry. It’s not preventing you from attracting new recruits. But, does the plan help you retain key employees or, maybe more importantly, encourage employees to retire in a timely manner? Are these business needs you’re concerned about regarding your retirement program? If so, then a large costly problem is building, which can be addressed.
If a material number of people stay with your company until they are over age 55, then your business is in jeopardy of the costly problems that can develop when employees reach retirement age and are not comfortable making the financial leap into retirement. Employees without the proper incentives will keep working past the company’s desired retirement age because of concerns that their money won’t last their lifetime (as well as other reasons).
The retirement program problem of concern is the lack of voluntary retirements. In the past, for mature companies, this problem had largely been solved with defined benefit programs providing lifetime income (creating security) and early retirement subsidies (providing incentive to retire voluntarily). For today’s fast-growing companies, the lack of voluntary retirements is a problem that has not surfaced yet. At these companies, relatively few people have reached their retirement age and high growth has created plenty of job openings at higher grade levels providing incentives for high achievers to remain with these companies. But almost all companies mature and the high growth years eventually slow down.
Without the benefit value and security of a strong retirement program, retirement-eligible employees will have little choice but to continue working. Age discrimination rules won’t allow for involuntary termination and voluntary severance can be expensive. Since these long service employees tend to be at higher grade levels, career opportunities for younger high valued employees are stifled. Employees staying into their retirement years can cause significant blockage and decline in promotion rates down the line. This typically causes a decline in morale and productivity leading to potential costly loss of strong performers at mid-levels.
Further, there are direct financial costs connected to those who “stay too long.” Compensation and benefit costs usually significantly exceed that of the successor employee. And, productivity levels are often less than the successor employee. We recognize that all companies have numerous key people that can never “stay too long” –but typically that’s an easier problem to fix and there are ways to keep these people around. Those that “stay too long” tend to be a more costly and challenging problem to fix.
Note that even though your company may have relatively high turnover at young ages, you still may have a sizeable number of people reach retirement age at your company. For your employees over age 40 your company is possibly their last job. Someplace is the last job for everyone – and typically turnover of employees over age 40 with 10+ years of service is quite low. Not only do you likely want your retirement program to be competitive, you also want it to allow for voluntary timely exit/retirement. Employees at retirement age will need enough retirement assets, security that they will not outlive their funds, and have the tools/education to understand how manage their assets throughout their retirement.
So, a strong retirement program will provide: 1) enough money to retire, 2) incentive to leave at some point that works for both the company and the employee, 3) security that the money won’t run out and 4) some retention value (encouragement to stay) before reaching retirement age. A typical competitive defined contribution /401(k) plan does a poor job of meeting the last three of these goals. There’s no incentive to retire early and an account balance (even if large) does not guarantee that income will continue for the rest of your life. The good news is that there are many ways to modify, tinker with and supplement a typical 401(k) plan to address the critical business goal of ensuring enough voluntary retirements without increasing your company spend on retirement. There are many options within the qualified plan world. Companies may be able to address these goals by changing the way contributions are spent. And, you don’t need to move to traditional defined benefit plans that build risky employer liabilities.
Companies may argue that younger and new employees may not directly or immediately value or appreciate that the company has a strong retirement program. But, since one of the most important things to younger and newer employees is the opportunity to grow, communication of the strong retirement program will make it clear that a key goal of the program is to create space at higher levels and allow for healthy internal growth/promotion rates.
There are some metrics that can be measured (depending on your company size, length of programs in place, maturity, etc…) or discussed qualitatively that can indicate potential problem areas that can be mitigated with a stronger retirement program. For example, what are the promotion rates at each grade level now, 5 years ago and projected 5 years into the future. Are there blockage points developing or likely to develop? What is the average voluntary retirement age of those employees over age 55 (with a minimum amount of service) and what was that age 5 years ago and where is it trending? What is the average compensation, benefits cost and productivity level of the last 50 employees that replaced retiring employees (compared to the level of the retiring employees)? Answering these questions can help you assess the adequacy of your retirement program and prevent difficult and costly problems down the road.
You may want to talk through the issues raised in this article at your next management meeting for a healthy discussion about helping to meet long-term business goals.
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