Incentives that increase individual savings for retirement help prepare employees to manage financial pressures more productively. Early on, and thereafter, taking ownership for retirement planning and managing personal financial stability can guide a smoother path toward achieving that goal. And when it's time to make the transition, the experience is likely to be more inviting than concerning, which also minimizes workforce management issues and other challenges for employers.
Legislative support for greater accessibility and a smoother path to retirement
In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) to help Americans overcome obstacles related to saving for retirement and enable greater access to a defined contribution plan. As 2022 came to a close, the SECURE 2.0 Retirement Savings Act (SECURE Act 2.0) was put into effect to further fortify the retirement system.
The SECURE Act 2.0 introduced a variety of mandatory and optional changes for retirement plans under both the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Its main purpose is to modernize the retirement system and boost plan enrollment through additional savings, simplified administrative requirements and altered regulations that plan sponsors are obligated or permitted to include.
These regulations emphasize simplifying and clarifying the rules of retirement plans, especially those related to elective-deferral contributions. The SECURE Act 2.0 mandates auto-enrollment for all new 401(k) and 403(b) plans and permits modest de minimis noncash incentives when participation begins or deferrals increase.
Maximizing 401(k) benefits with personalized education and proper plan maintenance
Support for retirement planning is a critical aspect of helping employees build financial wellbeing. When established as a provision of the Revenue Act of 1978, the 401(k) was initially viewed as a supplemental savings vehicle to the employer's existing retirement program. And typically, it centered on a defined benefit pension plan. Decades later, 71% now offer 401(k) plans as their primary retirement benefit.1 This change prompted a dramatic shift in the responsibility for saving from employer to employee.
Today, retirement advancements at the federal, state, industry and employer levels encourage employees to participate in a defined contribution plan — so they can start saving early on. The potential advantages are leveraging the power of compound interest and continuing to save consistently over time. Eighty-nine percent of employees want their organization to provide better resources for maximizing their available financial benefits. And 97% of HR leaders agree there's room for improvement in providing resources for maximizing those benefits.2
A well-designed 401(k) plan can enable sufficient retirement savings, but employees may underestimate the level required or start saving too late. Employers are using plan design features to encourage savings, such as an employer match or auto-enrollment. But that response hasn't addressed the enduring financial stress employees feel across all income levels, ages, demographics and industries. Employees are looking for guidance from their employers — provided through personalized education, coaching and access to financial planning advisors.
The rise of pooled employer plans as an alternative to traditional stand-alone plans
Improved designs that increase savings aren't effective for the 57.3 million workers who don't have access to an employer-sponsored retirement plan.3 But state-mandated retirement programs are becoming more common for organizations that don't offer this benefit, and this development has increased small employers' interest in setting up their own plans. Alternatives to a traditional stand-alone retirement plan include pooled employer plans (PEPs) or retirement plan exchanges, which can reduce the time, effort, cost and liability of plan sponsorship.
New tax credits introduced by SECURE Acts 1.0 and 2.0, along with existing retirement resources, can make 401(k) benefits more attractive by improving economies of scale that reduce costs. As a result of this legislation, employers can increase the number of funds available to employees in their accounts.
Apart from the ability to negotiate lower administrative fees, PEPs allow employers to access a broader range of investment options and resources, and provide financial education to employees. Pools also open the door to institutional-grade investments and risk sharing, which offers more predictable income streams in retirement. Potentially, these advantages may even boost the appeal and competitive standings of employers.
Despite the upsides of a PEP, several factors should be well vetted. Assessing additional or hidden costs, any administrative burdens that remain and acceptance of restrictions help determine whether this plan is the right choice for employees.
Promoting HSAs as a supplemental savings vehicle for medical costs in retirement
Healthcare expenses are a significant concern when planning for retirement. The top two results in a recent survey showed that employees care almost equally about medical coverage (67%) and retirement benefits (65%) when considering a new job.4 Another stat illustrates why retirement planning is so important — for a person aged 65 in 2023, it's projected that roughly $157,500 in after-tax savings is required to cover their healthcare costs.5
Several factors contribute to these costs, including increased life expectancy, healthcare inflation surpassing general inflation rates and a three-year gap between the average retirement age and Medicare eligibility. These considerations influence retirement timing, Social Security benefits and retirement cash flow strategies.5
Both employee contributions to a health savings accounts (HSA) made with pretax dollars and employer contributions can accumulate indefinitely. For 2024, following one of the highest annual increases ever announced by the IRS, the maximum HSA contribution limit for an individual is now $4,150, up 7.8% from $3,850 in 2023. The limit for families is $8,300, a 7.1% increase from $7,750.
Another advantage of these contributions for employees is reduced taxable income. Funds withdrawn and used for qualified medical expenses receive tax-free status from federal and state authorities. By providing an avenue to connect with a financial advisor during their working years, employers can also help employees understand and prepare better for retirement. At this stage in life, decumulating assets to pay for healthcare and other expenses has tax implications and risks.
Employers can benefit, too. More than 7 in 10 contribute to employee HSAs, providing a tax-deductible benefit on payroll contributions in their corporate filings.1
An HSA offers valuable features for financing both short-term medical expenses and building long-term savings, but widespread and persistent confusion about the full benefits of HSAs has yet to be clarified. Helping employees decide whether to use funds immediately or save them for the future requires targeted education and coaching. Clarification is important to maximizing value.
Improving retirement savings with emerging technology and targeted communication
Identifying and considering the diverse financial needs of employees promotes more equitable outcomes from retirement planning. Earnings and wealth disparities, financial literacy and family structures often affect an employee's ability to save. To support maximum savings potential at every point along the income spectrum, employers should offer targeted education and other financial wellbeing resources.
Emerging technologies are increasingly effective in helping employers address diverse workforce needs. They can connect employees to financial wellbeing resources more quickly and easily, through application programming interfaces, custom apps, or employee assistance program services such as financial coaching.
The rapid evolution of communication technology, including push notifications and chatbots, provides on-demand access to benefits information, reminders for enrollment and customized resource recommendations. A unified dashboard can also display the total financial value of employer-sponsored and voluntary benefits, empowering employees to make better financial decisions — about their 401(k), HSA or other factors that affect financial and retirement planning.
The evolving role of the employer from financial literacy to retirement readiness
Continual changes to plan designs, investment choices and technology resources often complicate employees' efforts to navigate the financial and retirement planning maze. While this pressure makes the daily demands of work-life integration more challenging, employers are in a good position to help.
Simplifying each person's unique journey with a well-coordinated financial wellbeing strategy that incorporates financial planning, including professional guidance, can instill retirement confidence. And whatever the future holds, collaboration between financial institutions, policymakers and employers can strengthen resilience as retirement planning evolves.
