For years some people have been warning that we’re in the midst of a retirement crisis. The retirement crisis is even more critical now, with the reality of the ongoing COVID-19 pandemic.
“Covid-19 has accelerated the systemic failures of our retirement system, particularly for women, minorities and non-college-educated men,” writes professor Teresa Ghilarducci and Tony James, executive vice-chairman at Blackstone. “With widespread unemployment, the pandemic is estimated to have pushed over three million older Americans into poverty, in large part because they were forced to retire earlier than planned. Most of these people have no safety net.”
“According to government estimates, only about 40% of Americans have access to a workplace retirement savings plan,” the authors add. “And, an estimated 27% of current or recently unemployed workers who have savings through a 401(k), IRA or other retirement account has already tapped, or plan to use these savings as a source of immediate income during the crisis. As the pandemic has raged on and emergency aid has started to dry up, this number could rise even higher.”
Of course, 37% of business owners lacked the profits to save for retirement prior to this. Moreover, small businesses are less likely to offer a retirement plan for their employees. In particular, only 28% of businesses with fewer than 10 employees offer retirement plans for employees.
But, it’s not all gloom and doom. Remember, retirement accounts are often tax deductible and aren’t as expensive as you may think. Basic services may be as little as $1,000 per year. And, you need retirement plans to remain competitive with top talent.
In short, it’s in your best interest to help your employee save for retirement by doing the following.
Pay Them Generously
Do you want your employees to start saving for retirement? Well, you’re going to have them a fair wage. One of the main reasons Americans don’t save for retirement is because they aren’t making enough money.
“The ugly, unspoken truth is that many people are just not earning enough money,” opines Ronald Temple, managing director and co-head of multiasset and head of U.S. equity at Lazard Asset Management, in Barron’s. “They barely have enough to cover their daily expenses; they don’t have enough left over to be able to save.”
In fact, it’s been reported that 41% of people can’t handle a $1,000 emergency. If that’s an issue, then how can you expect them actually to set aside money for when they retire?
One solution to this retirement crisis? Pay them a reasonable wage.
“Ensure that every worker earns sufficient income to be able to save,” suggests Temple. “This could be in the form of higher minimum-wage levels, earned-income tax credits, or other new ideas.”
Additionally, when you pay your employees more, they’re happier. In turn, they’ll be more productive and loyal. And this will lower expensive turnover costs.
How will you be able to pay for this? You may have to make sacrifices. For example, after giving employees raises that was as much as 10% to 20%, “there are things we are scrimping on,” Julie Irwin, owner of Spectrum Building & Restoration Corp. and a Servpro franchise, told WSJ.
To counter this, the company delayed purchasing new vehicles and tools. “We are making do with what we have,” she said.
Can’t afford raises? At least evaluate their salaries in comparison to inflation to make that they’re making enough. Or coach them on how to stretch their budget.
Educate Yourself on Retirement Plan Options
Just because you’re a small business doesn’t mean that you can’t offer a retirement plan. However, it’s a different matter if you can actually afford to contribute on behalf of your employees with options like pensions. Regardless if you can or can’t, you can still provide employer contribution matches.
Here are some of the most common retirement account options for small business owners:
- A payroll deduction IRA is available if you don’t want to take on all of the responsibilities. Instead, you set up the plan with a bank, insurance company, or financial institution. While easy to set up and administer, contribution amounts are limited.
- The Simplified Employee Pension (SEP-IRA) is one of the easiest retirement plans to establish and maintain for employees. Additionally, contribution limits are high. As of 2020, you’re permitted to contribute up to 25% of an employee’s income — but not more than $57,000.
- The Simple IRA is meant for businesses with over 100 employees where you make most contributions. It’s easy to set up with the individual contribution limit being $13,500 for 2020.
- The traditional 401(k) is one of the most popular retirement accounts where the contributions made are pre-tax. Employer contributions are optional, but employees can contribute up to $19,500.
- A Simple 401(k) is a subset of the traditional 401 (k) that’s similar to the SEP-IRA. You’re allowed to either contribute a 2% nonelective employer contribution or a dollar-for-dollar match up to 3% of compensation.
- A Safe Harbor 401 (k) is almost exactly like a traditional 401(k). The main difference is that you must make contributions (either as a match or a set contribution for everyone). Also, contributions must be fully vested immediately.
Ensure Broad Retirement Readiness
Hopefully, you’re more familiar with the retirement options that you can offer. However, it’s not expected that you become an expert. In fact, you should still work with a professional that can pin down the right plan for you and your team.
After you’ve identified and set up the retirement plan, help your employees prepare and stay on track by:
- Using automation. “Create a plan that makes enrollment automatic, along with the automated escalation of contributions at specific intervals and the selection of default investments,” recommends SHRM.
- Assisting with rollovers. You can assist employees “keep more money in tax-deferred accounts by aiding in the transfer of assets earned when working for previous employers into current accounts.”
- Identifying who needs help. You should run periodic reports and meet with them one-on-one in case they need additional assistance.
- Customizing your communications. For example, if you have over 50, you should emphasize the importance of catch-up contributions.
- Focusing on the whole portfolio. “Help people factor in any other assets they or their spouse may have, such as those from past employers, IRAs, Social Security, and other savings and investments,” adds SHRM.
And, most importantly, frequently kee in tough. Remind them to look at how their assets are invested. You may also want to keep them in the loop if there are new changes or features.
Keep Driving Participation and Engagement
Know that you’ve established a company retirement plan or at least assisted them in preparation, and stay on track; it’s now time to get them to participate and max out their contributions. I know. That’s a tall glass to fill, but it’s not impossible.
For starters, stress the importance and benefits of being in a retirement plan. After that, help them relax by providing access to resources and auto-enrollment. Moreover, you can have an advisor regularly come to the workplace for question and answer sessions or one-on-ones.
You may also want to schedule quarterly meetings to discuss employee benefits and answer any questions or concerns. You could even do something that’s more exciting and out-of-the-box, like hosting an annual benefits fair or 52-day savings challenge.
Create a Retirement Mentoring Program
Finally, invite retirees to come in and speak with your current employees. Why? Because they’re experts who can offer first-hand support and insights in preparing for retirement.
Better yet, retirees are overall incredible mentors.
“A mentor is an older, trusted friend or guide,” noted Lisa Bottomley for the Michigan State University Extension. “Mentors share their time, knowledge, and experiences with a young person.” And, they’re “perfect for this role as they have available time and an abundance of wisdom gained through life experiences.”
Retirees are also perfect for helping your employees who are close to retirement make the transition. And, from my experience, I feel more comfortable talking to an average Joe/Jane than an expert. I feel less judged and can relate more to their experiences.
