Financially included? Not so much, say nearly half of Americans

As financial pressure mounts on the shoulders of working Americans, clouds are gathering over their retirement dreams. According to recent consumer sentiment data from Principal, nearly half (44%) of Americans do not feel “financially included” or believe they will have the financial freedom to live and do whatever they want in retirement.

The Global Financial Inclusion Index data also found that:

• Nearly six in ten Americans (57%) expect to work past age 65. In addition, almost a fifth (18%) expect to work almost ten years after retirement age (65).
• Women are more pessimistic about their retirement. More women expect to work later in life and fewer than 40% believe they will be able to live the life they want in retirement.

We discussed the data with Chris Littlefield, president of Retirement and Income Solutions at Principal Financial Group, one of the top three retirement 401(k) providers with $1.6 trillion in assets under management, to better understand what the government, financial institutions and employers can do to continue to support the holistic financial and retirement needs of Americans.

Q: What is the most important thing employers can do to help employees retire at age 65?

A: Employers play a critical role in the financial well-being of employees. More than two-thirds of Americans believe their employers behave in a way that makes them feel financially included. As attitudes and expectations about retirement continue to evolve, including when and how people choose to retire, employers must continue to educate employees about the value of their retirement benefits while doing everything they can to to help workers start saving as early as possible.

Additionally, when determining the auto-enrollment deferral percentage and the amount of their corresponding contribution, employers should consider the implicit messages that employees may interpret from these decisions. Our research shows that in many cases, employees incorrectly assume that the deferment and matching contribution percentages set by their employers are sufficient to ensure success in retirement. However, we know that this is rarely the case. A good rule of thumb for the average working American is to save at least 15% of their annual income when factoring in employer contributions, and very few employers have automatic deferrals and corresponding contribution rates that equal this amount.

Q: What can employers do to specifically help employees who are more pessimistic about retirement?

A: There should be a concerted commitment to ensuring women have access to the tools and resources to help them protect and enhance their financial well-being. According to results from this year’s Principal Global Financial Inclusion Index, women continue to feel less financially included than men across almost all measures of financial inclusion. Two of the biggest gaps relate to access to quality investment products and tailored financial planning strategies for women. The impact this can have on women’s long-term financial goals can be damaging, especially since only 39% say they feel able to meet their financial obligations today while saving or investing for retirement.

In most surveys we conduct, women tend to respond more cautiously to these questions. However, there is still a gap to be filled and employers should have engagement strategies tailored to the different demographics and needs of their workforce. It can be a simple but powerful way to tailor communications, provide education and advice, and provide benefits that help achieve a person’s holistic financial goals.

Q: Are there any financial tools/programs employers can provide to help employees feel more financially secure?

A: When Principal surveys employees, we are consistently told that they want help with holistic financial planning, not just retirement planning. Holistic financial planning includes creating a budget, setting savings goals, managing debt, etc. These are important topics to support as we help Americans balance their short-term financial needs with saving for the future .
But taking it a step further, personalized advice has become necessary to help people balance their current priorities with long-term goals. The individual’s particular needs and their evolving financial situation mean that there are times in life when they may not feel confident making financial decisions, and that is where pinpoint advice comes into play. For example, in a recent Principal survey, 50% of Generation Z employees said they needed personal financial advice the most during major life events.

Therefore, to be effective, employer-sponsored financial wellness programs must begin with a deeper understanding of the diverse needs of your workforce in order to provide them with the benefits they desire.

Q: Are there changes to retirement plan design that employers/plan sponsors can make to increase retirement savings for employees?

A: One of the most useful things employers can do is to introduce automated features into their plan design – auto-enrollment, auto-increase an employee’s contribution rate to coincide with salary increases, and periodic auto-reenrollment for employees who opt out – to take advantage of the benefits These features can significantly improve participation and savings. Based on Principal’s proprietary data, auto-enrollment plans are at least twice as likely to achieve 90% enrollment as plans that do not auto-enroll participants. More importantly, 94% of people who were automatically enrolled remain on the plan. A second change would be to implement a hybrid or dual qualified standard investment alternative (QDIA).

Many working Americans feel financially stressed and overwhelmed. They want help and increasingly seek advice – someone to tell them what to do or someone to do it for them. A hybrid QDIA, which places workers into a target fund and then moves them into a more personalized service like a managed account as they approach retirement, can meet this need and potentially achieve better retirement outcomes. In a recent major employer survey, more than a third (35%) said they plan to consider a hybrid QDIA the next time they evaluate their QDIA options.

Q: Should employers offer more plan options that provide guaranteed income to retirees?

A: Although income-integrated solutions have evolved significantly in recent years, employers have been more reluctant to incorporate them into their plans. Today, we believe there are some important considerations for employers aimed at providing scheduled training, advice or services to help people better understand and prepare for their retirement income needs.
Each individual’s retirement income needs are very individual. Each person retiring has unique circumstances that dictate varying levels of guaranteed income needs. Providing one-size-fits-all solutions will not work. Instead, they must be personalized to help address a variety of factors such as total household assets and debts, caregiving responsibilities, tax considerations, social security, and other benefits such as health care.

Retirement income solutions must consider all available assets, not just those in a specific retirement plan. Without a holistic view of how much a person – and their spouse or partner – has saved outside of a workplace retirement plan, it can be difficult to determine whether enough assets have been accumulated or how best to convert their savings into a stable source of income in retirement.