The Reality of Retirement Savings and Employees' Overall Financial Wellbeing

March 19, 2019

Since the birth of the 401(k) plan 40 years ago, we’ve seen a gradual movement from defined benefit to defined contribution plans as the primary employer-provided retirement vehicle—a shift that forces employees to take a more active role in planning for their future financial security. Employers have made saving easier over time, incorporating features like automatic enrollment, automatic escalation, and target-date investment options. But is that enough? Are current employees saving adequately for a comfortable retirement? How are they coping with today’s financial stresses?

Aon’s 2018 Real Deal study on retirement income adequacy shows that only one in three employees will be adequately prepared for a comfortable retirement. The reality is that employees are juggling multiple financial priorities, and retirement savings often take a back seat. Employers need to recognize the challenges their employees face if they want to effectively help employees improve their financial wellbeing. So, to better understand their perspectives on retirement and financial wellbeing, we recently partnered with Ipsos, a global market research and consulting firm, to conduct a study of more than 1,000 full-time employees in the U.S.

One notable takeaway was that more than half of those surveyed feel they are not saving enough for their long-term needs, despite identifying retirement as their top savings priority. Many report putting off saving for retirement while they save for other goals, missing those critical early years of retirement savings that create the greatest impact through compound interest.

And our survey identified several other hurdles early-career employees face when it comes to retirement savings. For example, younger employees are more likely than their older counterparts to find financial matters difficult to understand. Six in 10 report that dealing with money is stressful and overwhelming. More than half have outstanding debts that prevent them from saving for retirement—an alarming 50% report carrying credit card debt and nearly 40% have student loan debt.

Encouragingly, younger employees are also more likely to trust their employers and look to them for help. Three out of four believe their employer is genuinely trying to help them optimize retirement savings. But employers have an opportunity to do more—about 60% of early-career employees want their employers to provide support in managing their day-to-day finances.

Finding the right balance of saving for retirement while also meeting today’s basic financial needs is a challenge for employees. How can employers help? Plan design is often used to encourage more robust retirement savings. Many younger employees take cues from their employers on how much to save, with 47% saving at the plan default or up to the match level. Plan features such as automatic contribution escalation and stretch matching formulas can significantly improve retirement savings levels. However, they are not a panacea. Some employees may actually be saving at healthy levels for retirement but are still unable to cover emergency expenses or pay off their credit card balances.

While many employers first started thinking about employee wellbeing from a physical health perspective, we now see an emerging employer focus on financial wellbeing. In addition to retirement plans, employers are providing education, access to planning tools, and even new benefits as part of a broader financial wellbeing program—addressing needs such as emergency savings, student loans, and college savings for future generations.

Supporting the overall financial wellbeing of employees can lead to increased productivity and lower workplace stress while simultaneously improving retirement readiness. How well do you understand the full range of financial challenges your employees are facing?

Some progressive employers are already using their 401(k) plans to support broader financial wellbeing. For example, some plans are beginning to offer assistance with student loan repayment strategies. Financial education and planning tools are also being delivered in conjunction with 401(k) plan communications.

How will 401(k) and integrated financial wellbeing programs evolve over the next 40 years to address financial challenges beyond retirement savings? Discover more with the Aon resources below:

The Real Deal Read more about the 2018 study at retirement-investment-insights.aon.com.

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