In the U.S., 67% of private industry workers receive retirement benefits from their employer, according to the Bureau of Labor Statistics, and for 52%, those benefits are defined contribution plans, such as a 401(k). But as an increasing amount of American workers are reaching retirement only to find themselves financially unprepared, employers and employees alike are craving a better solution.
According to Fidelity’s 2023 Retirement Savings Assessment, which rates retirement preparedness in the U.S., American savers have just 78% of the income they’ll need to cover their expenses during retirement, a decline from 83% in 2020. For those workers fast approaching retirement, their own lack of preparedness may come as a shock.
“For people who are retiring, in a lot of cases, their parents lived a pretty good retirement, but I don’t think it dawned on them why — and often it was because they had a pension,” says John Lowell, a leading industry expert and partner at October Three, a benefits and retirement consultancy. (Today, according to the BLS, just 3% of private industry workers have access to a defined benefit plan.) “Now their own retirement is catching them by surprise — and there’s no question we have a crisis.”
Read more: 4 reasons retirement readiness is declining
Providing employers with retirement plans that set them up for financial success not only helps attract and retain talent in a challenging market, but can create better economic security for generations to come. The recent passage of the Secure Act 2.0 by Congress includes bright spots that may help employees shore up their finances — including opportunities to build emergency savings and auto enrollment in 401(k) or 403(b) plans — but Lowell is eager to see additional innovation within the space.
Lowell recently spoke to EBN about why he’s cautiously hoping for a re-embrace of pension plans, why the expansion of retirement benefits may be more affordable than most employers think, and how he and his colleagues are pushing for what he calls the “plan of the future.”
When you talk to employers about their retirement plans, what are you hearing? What’s keeping them up at night?
HR leaders’ number one challenge is attracting and retaining a workforce of today and of the future. And what employees are saying [about how to do that] has changed a lot over the past couple of years. For various periods of time, the millennial and Gen Z “benefits” — the ping pong table and the keg of beer in the breakroom — were getting all the press. But in the past 18 months, survey after survey shows that employees are worried about outliving their wealth in retirement. People want guaranteed lifetime income — and we have found that “guaranteed lifetime income” are words that work much better than “an annuity,” which is an ugly, ugly word.
How are you seeing employers attempt to solve those problems?
On the guaranteed lifetime income, what’s getting all the ink — because everyone has a 401(k) plan — is the in-plan annuity solution. But when I talk to employers, I’m hearing that they don’t really want to do that, they don’t want a relationship with an insurance company, even if it is somewhat masked by being in this 401(k) plan. We also hear that, despite everyone wanting guaranteed lifetime income, nobody is taking it. For employees, the question is: Why does my account balance buy me so little? But if you’ve got an insurance company selling an annuity, one, they’re risk averse, and two, they’re middle men trying to make a profit. Which leaves us with the question: Should there be a revival of defined benefit plans?
Read more: SECURE 2.0 creates new retirement saving incentives for employers and employees
And what do you think about that?
I definitely think there should be. Do I think there will be? It depends how good the messaging is. I’m not expecting companies to put in traditional defined benefit plans of the style that we had in the 70s and 80s. But we’ve got a construct internally at October Three that we are referring to as the plan of the future. So if you’re working at a company, you’d have two plans: your investment plan, which is a 401(k), and your security plan, which is a cash-balance pension plan. In your investment plan, your employer may choose to match, and you get to decide how to invest and take risks if you want to. In your security plan, your employer provides all the money, and that account balance will grow at a rate of return you could get in the marketplace.
Your retirement dollars should be somewhat fungible. So when it’s time for you to make your benefit election, let’s suppose your security plan can get you $3,000 a month of guaranteed lifetime income. But if you say, that’s not enough, you can take some money from your investment plan, roll it over to your security plan, so that now you can buy $4,000 a month rather than $3,000 a month. And you can do it at a fair price. It gives the individual the ability to decide how to personalize their benefits to meet their needs.
How much is that idea of personalization playing into conversations you’re having with employers?
Especially for younger workers, personalization is a buzzword they want from their benefits and rewards programs. If you sell it as part of your messaging, and why it’s an important part, it resonates. But if you put it in a footnote on page 93, no, it won’t resonate with anybody.
Read more: 52% of retirees expect to pick up a part-time job to make ends meet
How are you and your colleagues targeting this messaging to help employers explain these offerings in a way that will get people to pay attention now rather than say, “I’ll deal with that later?”
It depends on who I’m talking to. If I’m speaking to a tech company that’s into gimmicks, trends and instant gratification, the message will be different than it might be in a very blue-collar workforce that, as a group, can’t afford to have instant gratification. Every workforce is missing something, and you have to understand what a particular workforce is missing and speak to that. Because nobody learns financial wellness growing up. I’ve seen corporate finance people who are retired and don’t really understand their own finances. It’s so much an education thing.
When it comes to your “plan of the future,” how do employers respond, and is it a heavier lift in terms of cost?
I’ll answer in a really stupid way: The cost of the plan is the cost of the plan. Tell me how much you want to spend on retirement benefits for your employees, and I can design a program that will cost you that much. There are certainly employers that are skeptical, but there are others that are saying, “Gee, you know, that makes a lot of sense.” The shift is not going to happen today, and it’s probably not going to happen tomorrow. But let’s keep talking.
