Retirement planning is a concept that has been present in the world for hundreds of years. As businesses enter and begin to navigate the modern era of commerce, the importance of providing a well thought out retirement plan for their employees becomes increasingly prevalent.
Since the early 1900’s American retirement plans have undergone immense progress. The Revenue Act of 1978 opened the door for 401(k) retirement plans to be utilized by workers in the United States. The concept of employees saving their own wages for retirement was unforeseen at the time due to many companies implementing an internal pension plan for employees for decades.
The provision presents in the Revenue Act of 1978 that allowed workers to defer taxes on a portion of their compensation led financial consultants and experts to realize the retirement planning possibilities of 401(k) plans if they could successfully convert a high volume of individuals to 401(k) retirement plans. In order to incentivize workers towards participating in the plan, organizations began offering matching contributions to employees’ 401(k) plan.
Although this was not the intent of the law, 401(k) retirement plans grew in popularity in the 1980’s. By the year 2000, over 30 million participants utilized 401(k) retirement plans with over $1 trillion in assets.
Along with progress, however, comes an increasing level of complexity making it difficult for business owners to identify and implement a retirement plan that best matches the wants and needs of their business and employees.
Importance of Retirement Plan Design
At its core a retirement plan for an organization’s employees is a vehicle for savings that employers can offer to their employees providing employees a chance to save for their retirement with tax-based advantages. Typically, workers will use a percentage of their wages to invest in their retirement plan each pay period.
In today’s economy, hiring excellent talent for any business is a highly competitive market where employees have more say over their place of employment than ever before. Thousands of jobs have been able to successfully convert to an online format in the past few years alone.
A highly competitive labor market means organizations need to do their best to stand out amongst competitors. One of the first steps in achieving this goal is the design and implementation of a retirement plan that fits not only the needs of your business but the needs of your employees as well.
Retirement planning allows a business to provide financial security when they decide to retire. Employees who take advantage of employer-sponsored retirement plans are in a position to be more prepared for retirement when the time comes, especially if they begin contributing to their plan in the early stages of their career.
Furthermore, employers that implement a well-designed retirement plan will typically see less employee turnover than an organization that does not have a retirement plan for its employees. Additionally, many organizations’ retirement plans offer vesting schedules. Vesting schedules are linked to matches in contribution to a plan and ensure that employees who want to receive the full benefit of their retirement package will not leave the business in a short period of time. Typically, vesting schedules are done in increments of 5 years. For example, for each 5 years an employee works at a company they would earn 20% of matching contributions. If the employee were to leave before their 5-year period comes to an end, they would forfeit a large percentage of what the company would have contributed.
Increasing Complexity of Retirement Planning
Not only has retirement plan design become increasingly complex with the implementation of new provisions and laws, but the wants and needs of the younger generation of labor is also evolving rapidly.
According to a 2017 article titled Retirement Needs and Preferences of Younger Public Workers by the PEW Research Center, the younger generation of workers has a vastly different understanding and goal for retirement planning than generations in the past. Younger workers are generally more confused about their plans, but their top priority is the ability to take savings with them when changing jobs as well as having a fixed, lifetime monthly benefit when they choose to retire.
Employers may not want to hear that younger generations of workers, or workers under 30 years old, have less propensity to company loyalty than older generations. In fact, PEW Research found that 60% of workers under 30 have no intention of working for their current employer for the remainder of their professional career. Workers between the ages of 30 to 39 were much more likely to stay with their employer until retirement with only 26% stating they would not.
What does this mean for an organization’s retirement planning? Employers need to recognize the needs of prospective employees and look to design a plan that capitalizes on those same needs. At the end of the day, a retirement package has become an expectation of employees, so it is important to design a plan that provides the most benefit to both the employee and the employer.
In the last 50 years alone there have been many changes in employer sponsored retirement planning. Pending legislation in Congress and constant changes to provider options and services leads financial experts to believe the rate of progress is not slowing.
Benefit of Outside Retirement Planning Support
This article has outlined both the evolution of retirement planning and the complexity of retirement planning in the modern era. As a business owner, starting or changing your organization’s retirement plan can be a daunting task to approach without the support and knowledge of experts in the field.
Fragasso Financial Advisors understands the nuance of retirement planning and since 2014 has had a dedicated department of experts helping businesses and organizations run an effective retirement plan. The Retirement Plan Advisors department at Fragasso Financial Advisors aims to educate business owners on the retirement plan options as well as educate employees to understand the benefits of using the plan.
Whether it is a large group meeting with your business’s employees, flexible virtual conversations to answer any questions for business owners or employees, or consulting business owners to help guide important decisions regarding retirement planning, Fragasso Financial Advisors can be the support vessel you need to take your business to the next level.
Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.