A Center for Local Government Excellence report about
reductions in state pension benefits should motivate employers to help
employees participate more fully in their 403(b) and deferred compensation
457(b) plans so they can comfortably retire at normal retirement ages. According
to the April 2014 study, 24 states have changed pension benefit calculations,
resulting in reduced benefits for participants. The reduction in benefits in
these states averages 6.44%, which creates an additional gap in employee
savings amounts needed to encourage timely retirement. Other states are
considering similar reductions.
Employers have an incentive to have employees retire at
normal retirement age versus continuing to work: substantial savings in salary
and benefit costs. According to one public school district’s salary schedule, a
long-term teacher at the top of the schedule will earn a base salary of
$71,500, while a newly-hired teacher will earn $32,000. The difference of
$39,500, plus some 15% to 20% or $5,925 in reduced fringe benefit and payroll
tax savings, will be a real difference in dollars saved for every teacher who
retires at normal retirement age. That amounts to nearly $450,000 annually for
only 10 teachers in a district.
403(b) regulations require that “meaningful opportunity” be
provided for employees to enroll in and make changes to their 403(b) plan. A
senior Internal Revenue Service (IRS) staff member in the Audit Division
defines “meaningful opportunity” as “year round activity” that includes
employee education and workshops.
General financial education, as well as education about the
retirement plan, can help employees get on track to a more comfortable
retirement. Employers must carefully consider the elements of the employee
financial education programs they offer. One consideration for employers in
developing a participant education program is whether the employer should
provide access to financial advisers to provide personal consultations to their
employees.
Case Studies
One financial adviser began calling on districts that
adopted a financial literacy program after the IRS focus on “meaningful
opportunity” was reported in late 2013. Districts would contract the adviser
for mandatory generic financial literacy workshops, followed with voluntary
“study halls” where employees could learn more. In addition to those meetings,
the adviser and his staff would distribute a list of all the approved product
providers, with contact information, so each employee could select his or her
own provider and financial adviser.
In one school district, the program was launched in 2013,
and after only four months participation in the 403(b) plan had doubled.
Participation increased for all the approved product providers, which the
district credits to improved awareness of the program and how it works.
For one school district, the financial literacy/study hall
program began in January, 2014, but participation has already more than
doubled. The financial adviser and his staff covered all worksites for this
district, including classified staff—an often overlooked group. The district is
benchmarking the success of the program by focusing on a comparison of
participation rates before and after the launch of the program.
When plan sponsors contract them for individual meetings,
advisers spend considerable time with employees and plan participants doing all
the important calculations, showing them how to “fill the gap” In their
savings. This means a thorough analysis of expected retirement income and other
resources for retirement, versus the actual costs an individual will face in
retirement. The adviser then assists clients in calculating the amount that
must be saved in voluntary savings plans to fill that gap. Advisers also help
their clients construct investment portfolios that are appropriate for their
individual ages and risk tolerances.
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