Confronting the Looming Retirement Crisis in America

American workers are not ready for retirement, and it is time employers take notice.

As the population ages, millions of people are discovering shortfalls in their retirement strategies. The standard of living they planned for is becoming increasingly difficult to reach and harder to maintain.

Experts believe this problem will only grow over time. Studies show the current workforce is ill-prepared for retirement dates that are still 20 to 30 years away. For these workers, access to reliable retirement funds is worse than it was in the 1980s, underlining the critical situation that has developed for retirees over the past 40 years.

A Major Problem

The Employee Benefit Research Institute found that the U.S. median for 401(k) account balances was $18,433 in 2013. The numbers are a bit better for employees aged 55 to 64, who managed a median of $76,381. However, nearly 40 percent of workers across all demographics have less than $10,000 saved, and, as the Center for American Progress reports, more than 30 percent have no retirement savings at all. Among retirement-aged people, 19 percent are without any pension or retirement income beyond Social Security. These shortfalls are going to place even more pressure on over-burdened resources such as government agencies, charities and families that are already starting to feel the weight of the retirement crisis.

Missing the Mark

When defined-contribution plans such as 401(k) and IRAs were introduced, the allure of amassing wealth tax-free through prudent investments was a promising prospect for many employees. Free money in the form of employer-matched contributions made the plans even more attractive, and workers felt they could fund a more comfortable retirement by trying their hand at investing rather than relying on a fixed pension from their employers.

These plans were also beneficial for employers who found that offering defined-contribution plans cost less than traditional defined-benefit plans. Soon, defined-contribution plans became the standard way of saving for retirement.

However, 401(k) and other defined-contribution plans have two integral flaws. The first problem is that, unlike pensions that are provided automatically, 401(k) plans are usually offered on an opt-in basis. Many employees may not realize this option is available, while others may not be comfortable putting money into one or may feel that they simply can’t afford the paycheck deduction.

The second problem is that traditional pensions are designed to provide lifetime income, but defined-contribution plans carry no guarantees on returns or income. Workers who rely on these funds for retirement are at the mercy of a volatile market that can wipe out years of gains.

Beyond these two significant factors, the amount of control individuals have over their 401(k) and IRA accounts can also be detrimental. Employees are generally not knowledgeable enough about investments and financial markets to make the best decisions regarding their accounts. They may get spooked by the normal fluctuations in the market and make bad decisions, or miss out on opportunities to capitalize on favorable circumstances.

And even when employees do receive advice on their invested retirement funds, the recommendations may conflict with their goals in the name of increased compensation for brokers and other financial handlers. In fact, the fees that some financial service professionals charge can decrease account balances by up to 20 percent. This likely stems from a tendency for the industry to place its interests ahead of the employee or investor.

Considerable Ramifications for Employers

Employees can see the writing on the wall, and they are becoming increasingly worried about their futures. But companies are also feeling the effects of the retirement crisis, and it’s impacting the company's bottom line.

Employees who are under financial stress are less productive than their stress-free counterparts. They are more distracted, more prone to mistakes and accidents, and are more careless in their work. These employees also miss more work, often due to stress-related illnesses that, in turn, increase the company’s healthcare costs.

Financially stressed workers decrease morale not just for themselves but for other workers around them who have to pick up the slack. These employees are also more likely to engage in unethical behavior, such as stealing and providing privileged information to unauthorized parties.

Employees who are uncertain about their futures are also more likely to leave the company in favor of an organization that offers better benefits. This turnover can be expensive, especially for specialized positions that gain from employees who stay with the company over the long haul.

A New Approach

The shift from defined-benefit plans to defined-contribution plans has left a void that many workers may not notice until it’s too late. This is especially true for those who already have trouble making ends meet, leading to substantial societal problems down the road. While increased consumer education regarding retirement fund vehicles is important, employers are the ones who must drive the necessary changes to solidify their workers’ retirement. They will also share the benefits of strengthening their employee’s future.

It starts with offering meaningful financial initiatives that help employees reach their retirement goals. Companies need to take a larger role in engaging their employees to ensure they are making informed decisions about their work-related retirement funds. This means providing ongoing education on retirement options, as well as automatic enrollment in the company’s defined-contribution plan to give employees a jump start. Employers also need to pay close attention to the fees and other expenses that employees incur.

Many workers have built comfortable nest eggs by making the switch from pensions to defined-contribution retirement plans. But for the millions of Americans who haven’t found their footing with 401(k) and IRA retirement plans, it has been an exercise in futility. Companies need to take a more proactive approach to protect their employees’ wealth — and their own bottom line.

Sources:

[1] Center for American Progress: The Reality of the Retirement Crisis https://www.americanprogress.org/issues/economy/report/2015/01/26/105394/the-reality-of-the-retirement-crisis/

[2] NBC News : Retirement Crisis: The Great 401(k) Experiment Has Failed for Many Americans http://www.nbcnews.com/business/retirement/great-401-k-experiment-has-failed-many-americans-n327321

[3] Financial Analysts Journal: After 70 Years of Fruitful Research, Why Is There Still a Retirement Crisis?

http://www.cfapubs.org/doi/full/10.2469/faj.v71.n1.1

[4] The Consumer Financial Protection Bureau: Financial wellness at work http://files.consumerfinance.gov/f/201408_cfpb_report_financial-wellness-at-work.pdf

[5] The Star Tribune: The real story about retirement: Millions of baby boomers face financial crisis http://www.startribune.com/the-real-story-about-retirement-millions-of-baby-boomers-face-financial-crisis/334718191/