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Employers: Are 401(k)s Even Worth it?



Employers: Are 401(k)s Even Worth it?
A look at the implications of having or not having a 401(k) in today's environment

With the United States Department of Labor and the Securities Exchange Commission fighting over 401(k) standards, many employers are asking an important question: Are 401(k)s even worth it? Setting up a retirement plan can be expensive.  There are recordkeeping fees, advisor fees, fund fees, TPA fees, and audit fees to name a few.   Then, if you have an employer-sponsored match or a profit-sharing plan, the costs can seem overwhelming. At times, employees don’t even seem to appreciate the benefits you are providing for them.

While employees are often a company’s greatest “assets”, they are also often one of the biggest costs.  Keeping employees happy to work for you is one of the keys to success, but often the benefits a company provides tend to be overlooked.  Beyond keeping employees happy, a 401(k) can keep company costs down significantly in the long run.

Currently, 73% of employees plan to delay their retirement, according to a study done by the NHP Foundation.  In the past, employers would provide pension plans or defined benefit plans, which gave employees a greater sense of security and a predictable timeframe for retirement. Now, with market volatility, longer life expectancies, and less overall savings in retirement, employees are forced to work deeper into their “retirement” years to catch up with their savings and needs.

MassMutual, a leader in the retirement plan space, has done extensive research in the aging workforce and the costs associated with having employees work longer than they would like.  According to studies, these costs can be significant.  The Bureau of Labor Statistics sites on average, an employee that is 30 has a salary that is $22,300 less than a similar employee in their 60’s. Also, the annual employer health care and disability premiums jump from $3,100 for the 30 year old to $11,300 for the 60 year old each year. That is an increase of roughly $30,000 per year per employee over 60 years old.  And this doesn’t account for productivity either.  When this is all added up if you have 10 employees working in their late 60s, who would retire if they could, this could be costing you roughly $300,000 per year.

Now, this isn’t suggesting anyone should fire their 60+ year-old employees. These older employees often provide great value to a company, not the least of which is the decades of experience that a 30-year-old does not have (at least based on the math).  However, if you have employees that would like to be retired but who haven’t prepared themselves financially to do so, a little up-front cost may save you and your company hundreds of thousands of dollars in the long run.

Other costs to the company can also come from employees’ financial stresses and unexpected turnovers. According to the Forbes article “Are you financially Stressed?” (2013), financially stressed employees cost employers roughly $5,000 per year per employee in production. These employees tend to use more “work time” to focus on personal finances.  As well, they have a harder time being focused at work because they are thinking about other things.  Additionally, unexpected turnover costs an employer roughly 150% of salary for replacement and productivity loss.  So making sure your company offers competitive benefits is extremely important.

As an employer, what do?  You can’t force an employee to be responsible for his/her paycheck. However, here are a few tips to encourage greater savings habits.  First, make sure your financial advisor in charge of the retirement plan is doing regular education seminars.  Even basic financial education will help employees see the long term benefits of saving and compounding interest.

Second, consider plan design changes in your 401(k) plan.  For example, you could set up an auto-enroll where the employee has to sign off in order to opt-out of the plan.  A lot of employees like the idea of savings but lack the motivation to get started.  Auto-enroll will help give employees that initial incentive, and if they decide they don’t like contributing to a retirement plan, they can always stop at any time.

Another plan design to consider is the Qualified Default Investment Alternative. If your participants don’t know where to invest, your plan should have a QDIA.  Most of the time it is appropriate to set the QDIA as a target-date fund based upon the employee’s age and expected retirement year.  This will allow employees to invest their money and potentially watch it grow over time.  If the participant’s money automatically sits in cash instead of a QDIA, not only could this hurt them in the long run, there are fiduciary responsibilities at play here. There needs to be an investment in the plan that participants can default to if they don’t know where to start.

A third option would be for the company to offer a matching contribution – even a small one – to the employee contribution.  Whether you want to offer a dollar for dollar up to 3%, or 25 cents on the dollar up to 6%, giving a match increases participation because the employees feel they are getting greater benefits(think: “free money”) by participating.  A matching contribution, at first, can be a harder pill to swallow for employers, but there are multiple benefits from this option.  Not only do participants contribute more if there is a match, but you can also set a vesting schedule to help retain employees.  For example, the matching contribution can be withheld in part from the participant until they have been with the company for 6 years.  This discourages higher turnover, as employees don’t want to leave money on the table.  As mentioned earlier, less turnover is more money in your pocket as well.  With this option, an employee feels like the company cares more about his/her future.  As a result, employees feel more connected with their jobs because their employer is looking out for them by providing competitive benefits.

These are just a few tips to help improve your company’s financial situation.  Like owning a car, no one likes to pay for annual maintenance.  But a little upfront cash can save you thousands of dollars in the end.

James Schramm, Financial Advisor

Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Any opinions are those of Schramm Financial Group and not necessarily those of RJFS or Raymond James.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  There is no assurance any of the trends mentioned will continue or forecasts will occur.  The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Raymond James is not affiliated with the MassMutual.

Schramm Financial Group is not a registered broker/dealer and is independent of Raymond James Financial Services

Securities offered through Raymond James Financial Services, Inc. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.

James Schramm is a financial advisor who runs a boutique investment firm that focuses on creating real wealth for business owners. They use high level investment and tax strategies to allow clients to retire on their terms. Schramm Financial Group was established in 1991 and has been a staple in the greater Los Angeles area. 27951 Smyth Dr. Suite 100 (661) 294-9555

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