Critical Thinking: The Silver Tsunami
Helping Employees Prepare for Retirement Retirement Plan Consulting
Critical Thinking: The Silver Tsunami
“The inability to retire will impact employment decisions over the next 19 years as 74 million American Baby Boomers reach retirement age.”
Since January 1, 2011 about 10,000 people per day are turning age 65.1 As we experience the Silver Tsunami in America, concerns of an aging population coupled with the fact that the vast majority of Americans have not saved enough money for retirement will place new pressures on not only our economy and social systems, but also on employers. Delayed retirement is costing employers anywhere from $10,000 to $50,000 per employee.2 In 2015, 45% of workers had less than $10,000 in savings or investments.3 If people can’t afford to retire, it will drive up costs for employers who are burdened with higher salaries and healthcare costs associated with older workers. The inability to retire will impact employment decisions over the next 19 years as 74 million American Baby Boomers reach retirement age. As such, we will witness new challenges in the healthcare system, retirement system, tax revenue, individual spending rates and society as a whole.
The Retirement Challenge The main sources of income and investment that contribute to a secure retirement, and the challenges that keep millions of Americans awake at night: • Social Security. Will it be there when I retire? Changes to the system are inevitable. The United States will likely see reforms to the Social Security system. • Personal Savings. Will my cash balance and investments leave me too little in the end? The personal savings rate in the United States was 5.5% in 2015. With the economic issues that have plagued the country, individuals have not had excess dollars to place into personal savings. As a comparison, the personal saving rate in 1980 was 9.8%.4 • Defined Contribution Plans (401(k), 403(b) and 457 retirement plans). Has the impact of low contributions to our retirement plans sunk my retirement ship? Defined Contribution Plans are very effective retirement savings vehicles, but individuals have to take the accountability to participate. A savings rate, including employer matching contributions, between 10% and 12% for 20 years is needed to create a scenario for a comfortable retirement. The average employee deferral rate for 401(k) plans in 2014 was 6.5%.5 • Defined Benefit Plans. Has rising healthcare costs made living longer unsustainable? Defined Benefit Plans are a tremendous employee benefit and were once a major part of the equation when creating a formula for a successful retirement outcome. While more common years ago, many plan sponsors have either terminated or frozen these DB plans because of the economy and the cost and funding liability. Just 42 of the Fortune 100 companies offer defined benefit plans to their new employees.6 • Home Equity. Has the crashing of the housing market wiped out
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Critical Thinking: The Silver Tsunami
a savings vehicle for me? With the continued housing slump and increased foreclosure rates, housing markets have been slow to bounce back. Nationwide, one in four homeowners with a mortgage—11 million households—has an underwater mortgage (where there is more money owed on the home than the home is worth). Home equity has always been counted on to help fund retirement. All these challenges underscore the largest roadblocks to retiring with financial independence.
Preparing for the Silver Tsunami
40% A recent AARP study showed that 40% of current employees feel they will never be able to retire.
For employees, the building of financial assets is key during working years (personal savings, retirement savings/funds, Social Security, etc.). Depending on how one wants to live in retirement, current expenses should be reduced by as much as 40 to 60 percent if, for example, a mortgage is paid off before retirement. Unfortunately, many are entering retirement with debt and insufficient financial assets. Individuals will need to lengthen their working careers or possibly work for the rest of their lives not only for additional income but also for continued employer-provided group health insurance. A recent AARP Study showed that 40% of current employees feel they will never be able to retire.7 A nonretiring workforce can seriously impact organizational productivity going forward. For employers, managing turnover will be crucial. Older workers are typically higher paid with higher healthcare costs and more time out of the office (vacation, sick time). They do have more experience and are motivated to keep working whereas younger workers have more options in the marketplace and may be difficult to retain. Striking a sustainable balance of younger and older talent is necessary.
Getting Started: 1. Embrace the challenge. It will not go away in a couple of years. It will need to be managed for 19 years or more. With nearly two decades of Baby Boomers to go, this is the new reality. One way to embrace the challenge is to offer employees a Financial Wellness Fair to help educate employees on what they need to do now to prepare for the future. 2. Invest in the future of your organization and your employees. Instead of offering a salary increase at the end of an employee review cycle, put at least part of that increase towards the employee retirement fund. They may not thank you now, but when retiring becomes an option, money in the bank will provide incentive and peace of mind for the employee, and possibly save the organization in expensive severance and buyout fees. 3. Work with consultants. You need their expertise and experience to evaluate the company’s benefit package for retiree medical, wellness, defined benefit, defined contribution, and nonqualified executive benefits. Creating the proper benefit package can not only help the organization recruit and maintain talent, but will also assist in ensuring that when the time comes, workers are in a position to retire. 4. Create a communication and education process for employees. RETIREMENT PLAN CONSULTING
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Critical Thinking: The Silver Tsunami
Help them better save for a secure retirement. Once implemented, benchmark the results to determine what additional career cycle education may be needed to improve individual retirement results. 5. Create personal awareness and accountability. Develop processes and financial statements to help employees better understand their financial position and how to improve their retirement readiness. 6. Build processes and standards for managing an aging workforce. Focus on productivity and profitability. This might include an aggressive wellness campaign to mitigate and manage, as best as possible, the onset and maintenance of chronic conditions. 7. Manage and mitigate fiduciary risk. Develop procedural and substantive prudence. By implementing specific criteria for investment reviews or for monitoring expenses, you not only reduce the fiduciary liability risk of and organization, but will help to further enhance the quality of the plan offered to employees. The evolution of workforce demographics will create new and interesting challenges for organizations of all sizes and industries. Gallagher can help you to create the processes and deliverables that will help you to navigate this changing landscape to enable your business to thrive. Please contact your local Gallagher Consultant to find out how.
1
Pew Research Center population projections
2 3
EBRI.ORG. 2015 Retirement Confidence Survey.
4 5
PSCA 58th Annual Survey of 401(k) and Profit Sharing Plans
6 7
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Critical Thinking: The Silver Tsunami
About the Team The Retirement Plan Consulting team of Arthur J. Gallagher & Co. helps organizations maximize total benefits and compensation by aligning retirement philosophy and plans with an organization’s goals. Through consultative partnership, Gallagher helps organizations manage plan selection, plan design, fees, documents, investments, regulations, employee education, long-term planning and crucial fiduciary obligations between an organization and its employees. Bill Kline leads Gallagher’s Retirement Plan Consulting as the National Practice Leader. He has more than 25 years experience in retirement plan benefits and financial services.
Bill Kline
Bill Kline National Sales Leader Retirement Plan Consulting
[email protected] 919.830.7277 www.ajg.com
This material was created to provide accurate and reliable information on the subjects covered, but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Gallagher Benefit Services, Inc., a subsidiary of Arthur J. Gallagher & Co., (Gallagher) is a non-investment firm that provides employee benefit and retirement plan consulting services to employers. Securities may be offered through Kestra Investment Services, LLC, (Kestra IS), member FINRA/SIPC. Investment advisory services may be offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Certain appropriately licensed individuals of Gallagher are registered to offer securities through Kestra IS or investment advisory services through Kestra AS. Neither Kestra IS nor Kestra AS are affiliated with Gallagher. Neither Kestra IS, Kestra AS, Gallagher, their affiliates nor representatives provide accounting, legal or tax advice. GBS/Kestra-CD(190123)(exp062017) © 2016 Gallagher Benefit Services, Inc.
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