Designing Retirement Plans that Work

The Health-Wealth Connection – Understanding the power of a physically and fiscally fit workforce

I was at an industry meeting recently speaking to a group of employers, retirement plan record keepers, and financial advisors about the state of retirement readiness in America as we move from old America (working for one employer and defined benefit pension plans) to the new America (multiple jobs and defined contribution plans). 

The central theme of the talk was that while Americans are not saving enough, viable solutions to get more Americans on track are becoming increasingly clear. We just need to move faster. 

Through retirement plan design strategies like auto-enrollment, action-oriented re-enrollment and  asset allocation choices, we can help get more Americans saving and preparing properly for retirement right now. We can take steps toward winning this war today by designing plans that work from the get-go. To that end, we need to start with higher goals:

  • Move toward 90%+ participation rates (versus current industry norms in the 40-60% range).
  • Increase deferrals to 10% plus the employer match over an entire working career (versus current industry norms in the 5-7% range).1 
  • Strive to see 90%+ of participants in well-diversified investment choices. 

These  retirement plan designs – plans with automatic features and well-diversified investment options – can translate into winning outcomes for many more Americans. These are plans that can work!

One of the attendees, a benefit manager from a large employer, took me aside after my talk and said, “I agree!  I want my company to dive in, but here is my problem. When I go back to the office, my CFO will ask me a simple question – ‘why should I care?’ He will remind me that our surveys indicate that our employees are highly satisfied with the benefits that we provide. ‘A retirement plan is just table stakes,’ he will say.  I know he believes that introducing things like auto-enrollment and a more invasive re-enrollment will only increase our matching costs. What should I tell him?”

Here are some ideas I shared – “As few as 20% of your employees may be on track  for retirement if your results are consistent with national norms.2 This means that as many as 80% of your employees may not be saving enough. As a result, financial stress can have a constant presence in the daily lives of many of your employees. The more your employees worry about financial security, the less they may focus on the work they do every day for you. On the other hand, presumably the less your employees worry about finances, the more focused, engaged, committed, loyal and productive they can become.”

“Another factor you can share is that financial stress is a major driver of unhealthy behaviors. Unhealthy behaviors are a huge driver of healthcare costs. If you can help employees increase financial wellness, you may also help increase their healthy behaviors. Combine this with a well-constructed physical wellness program and you could see dramatic positive workforce management results on multiple fronts, including lower absenteeism, lower workers compensation claims and lower healthcare costs – not to mention, higher engagement, productivity and satisfaction levels.” Check out this white paper, Wellness = Retirement Savings, from our partner, Accountable Health Solutions to learn more.

There are many options for designing plans that work  that can be balanced against short and long-term matching expense impacts (e.g. – adjusting the employer match to incent higher deferral rates at no additional cost to the employeror, using auto-escalate to drive better savings over time).  

Plans that work are good for the company and good for employees.  A true win-win!  That’s why employers should care.



1 Based on analysis conducted by the Principal Financial Group®, August 2013. The estimate assumes a 40-year span of accumulating savings and the following facts: retirement at age 65; a combined individual and plan sponsor contribution of 12 percent; Social Security providing 40 percent replacement of income; 7 percent annual rate of return; 2.5 percent annual inflation; and 3.5 percent annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 85 percent of salary. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.  (The Principal®)

2 Employee Benefit Research Institute, 2012 Retirement Confidence Survey.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services provided by Principal Life Insurance Company, member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

@ 2013 Principal Financial Services, Inc.     HZ1595  t13102401ra