Prior to his State of the Union Address to Congress and the American people, President Obama outlined new policy initiatives targeting retirement security for the middle class, which would include significant implications for employers.
One proposal is aimed at employers who do not currently offer retirement plans. They would be required to offer employees an automatic IRA. A direct deposit withdrawal would be made from an employee’s paycheck, unless he or she opted out of the plan. To help match those contributions and help employees speed up the growth of the account, the saver’s credit would match 50 percent of the first $1,000 of contributions by families whose annual earnings do not exceed $65,000 a year. And, a more limited credit would help families earning up to $85,000 a year.
There are other proposals that would impact companies that currently offer retirement plans, such as 401(k)s. The intent of these proposals is to provide more transparency to employees regarding hidden plan administration fees. In addition, other proposals would require the company to provide unbiased investment advice, the promotion of annuities or other guaranteed life income vehicles and a review of target date funds.
Target date funds started receiving a lot of attention after last year’s stock market collapse. The funds are designed to essentially be an all-in-one portfolio for participants, with a glide path that reallocates the investment mix, based on an employee’s anticipated age of retirement.
But a recent study by the Employee Benefit Research Institute found evidence that participants may not understand the plan’s design. As a result, employees are putting some of their account funds in the appropriate target fund and then investing the other part in non-target funds. The EBRI’s study says this behavior “… could lead to an unexpected result of ending up with a potentially inferior portfolio in terms of risk/return tradeoff from more assets allocated to some sectors than the designers of the target date funds had planned.” One outcome of the President’s proposals could be to require employers to provide more communication and education efforts around target date funds.
Why should employers, the President and Congress be concerned about retirement planning for Americans? Because it is an issue employees care about. An EBRI retirement confidence survey found 55 percent of Americans believe they are behind schedule for retirement savings and, although 70 percent of Americans have started saving, many have saved less than $25,000.
If employees are insecure about their financial future, it can detract them from their workplace productivity. Employers who make retirement savings a priority will have an edge in attracting and retaining top talent. Whether or not the President’s proposals create a nudge for employers and their workforce to be proactive about saving largely depends on how the final legislation is crafted. But retirement savings is an issue of concern for the middle class. And employers who address it will create a partnership with employees that generates loyalty and commitment among their workforce
Michelle Hicks is a communications consultant with Buck Consultants, and ACS Co. Contact her by e-mail at email@example.com.