🔒Investment education: Companies find ways to help employees shoulder the cost of retirement

Five years ago, fewer than 20% of the employees at Futureguard Building Products, a family-owned manufacturer in Auburn, participated in the company-sponsored 401(k) investment plan.

“I said, ‘Really? You think you’re going to retire?’” Diane Rogers, vice president of human resources and safety, recalls telling employees.

Rogers, who had just been hired and was about to shake things up, convinced the owner to provide a greater incentive to invest.

At her urging, the company raised the match from a flat rate of $100 per year to 2% of employee contributions. On a $50,000 salary, that’s $1,000. Since then, the match has been increased to 3%.

She posted plan information and sent emails, encouraging people to sign up. She hired a new financial planning company, Richard Brothers Financial Advisors in South Portland, which provided quarterly on-site presentations and met one-on-one with employees. She paid attention to individual employees, urging them to stop throwing away free money that came in the form of an employer match. She explained they could start with a 1% contribution; they wouldn’t even miss it from their paychecks.

Today, Futureguard has a participation rate of 64%.

“The biggest thing is education,” says Rogers. “It’s now to the point where they say, ‘Oh my god, did I miss the deadline?’”

Financial stress

Financial advisors and human resources experts agree that education and personal attention are key to hiking participation rates in employer-sponsored investment plans.

“Employers can be more supportive in putting in place a learning platform for their people to be able to handle financial stresses, and that includes making better financial decisions,” says Randall Richard, founder and president of Richard Brothers. “Most adults have little to no formal training in financial matters. If you look at studies, employees making less than $75,000 per year, which is the majority, don’t have an advisor to help them with financial matters. So what are people doing? They’re talking with other employees who also don’t know what they’re doing many times, or to family and friends. It’s an issue.”

Employers also struggle, he says.

“Employers around the country are struggling with how to help their people,” Richard says.

The two biggest stresses people have are health and financial matters.

“Employers need to set up a program that supports learning how to make better financial decisions, how to deal with, maybe, an elderly parent moving in, or maybe going through a divorce. If employers don’t help their people, their people don’t show up to work or, when they’re at work, they’re worried about personal matters,” Richard says.

We thought, being small and local, it was important to invest in our employees and make sure they would have a nice nest egg at retirement.
_{—Annette Nadeau}

Personal attention is important from the human resources standpoint, too, says Annette Nadeau, CFO of Auburn-based Bedard Pharmacy and Medical Supplies.

Nadeau and her husband bought the business in the late 1990s and set up a 401(k).

“We thought, being small and local, it was important to invest in our employees and make sure they would have a nice nest egg at retirement,” she says.

They started working with Richard Brothers three years ago, selecting the firm because of its personalized attention. Their previous advisor, she says, treated the company as “a side note. We never heard from them. If we did, it was just because something was due.”

Richard Brothers brought in a key provision — opt-out, versus opt-in. Enrollment of new employees soared, says Nadeau. She meets with those thinking of opting out.

“I just had someone who graduated from college,” she says. “She said, ‘I’ll opt out. I’ve got student loan debt.’ I said, ‘Do you buy pizza every week?’ She said yes. I said, ‘The cost of that pizza could be a retirement home in Florida.’ You’ve got to bring the conversation to their level.”

A little prodding

Employer-sponsored plans are dominated by 401(k)s. Other plans include tax-deferred Individual Retirement Accounts, including what the IRS calls a Savings Incentive Match Plan for Employees (SIMPLE IRA), and simplified employee-pension IRAs. There are also retirement plans through employers like schools and government agencies.

The plans provide a basic architecture for discretionary features. For example, with a 401(k), employers decide things like investment options, contribution caps, matches, and whether loans from the plan are allowed. Employees decide things like whether and how much to contribute.

But many employees don’t understand their immediate and long-term financial needs and how the plans benefit them. So more employers are implementing workplace financial wellness programs. Experts agree that those, plus strategies like on-site visits and personalized consulting, are key to hiking participation.

The trend is for employees to take control of their own retirement, says Vance Gray, founder of Bangor-based VanceGray Wealth Management Inc.

“Unfortunately, that’s a slow process,” Gray says. “People work hard for their money, but once they have it, they may not pay attention to it. A lot of people just say, ‘My employer will take money out of my paycheck and stick it in this fund.’ Employees have to realize how valuable that money is, and that it needs to keep working after they receive it.”

Education helps employees understand the importance of investing and overall financial planning, Gray says.

“Sometimes it takes a little prodding,” says Gray. “It’s not easy for young employees to think along the lines of retirement when they’re 32. Once they cross that 40-year-old mark, they’re more serious about it.”

Education is even more important in today’s work environment, where people tend to jump between jobs a lot more.

“It’s five years here, five years there,” Gray says. “Suddenly, an employee can have multiple 401(k)s. We show them their options. A lot of them don’t realize they can roll an old 401(k) into their new one, which may result in better opportunities and easier management.”

“It’s got to be hands-on — email blasts, letters with their paychecks,” says Jennifer Cram, FutureGuard’s senior human resources specialist.

The prodding pays off.

“They come to our office, we help them log on, and they see how much they have,” Cram says. “I had one employee who had a 401(k) for a while, but had never logged on. He logged on and the look on his face was, ‘Wow!’”

What plan is right?

Often, it’s the employer who needs education. A number of factors go into deciding what type of plan is right for a business.

Smaller employers are likely to select an IRA, says David Hanson, managing partner of IIS Financial Services in South Portland.

“There’s less paperwork at the end of the year,” Hanson explains. “If they want more of a robust plan and want to make a vesting schedule or, say, a profit-sharing option, which is good way to keep employees, they choose a 401(k). Any large employer will have a 401(k).”

Gray says a large corporation of 100 employees might be looking at significant administrative costs for a 401(k).

“Costs sometimes are passed along to the employees. Sometimes employers are willing to accept the cost,” says Gray. “If it’s prohibitive, an employer might say, ‘I can’t afford to spend $7,000 just to have a plan.’”

Smaller companies using a SIMPLE IRA can have much lower costs, due to less administration, Gray says.

“That’s because the onus is more on the employees and there’s no third-party administrator necessary,” Gray says. “Thus, the word ‘simple.’”

Employee earnings

The investment rule of thumb, says Hanson, is for an employee to accumulate two times his salary by age 35, four times by age 45, and 10 times by age 67. He notes those figures vary according to other financial pieces, such as inheritances or spousal money.

“Each person’s situation is a little different,” Hanson says. “But the rule of thumb is you want seven to 10 years of your annual salary in your 401(k) by the time you retire.”

Workers earning $50,000, who start investing 5% at age 25, for a 5% annual return, will have $500,000 at retirement, says Hanson.

Employees with a similar salary who start at age 40, will need to invest 16% to accumulate $500,000 by retirement. If they invest only 5%, the outcome at retirement will be approximately one-third of the $500,000, or $166,000.

Successful plans relate to company success. “Having a solid retirement plan can help with recruitment and with maintaining high-quality employees,” says Gray. “If an employer has a solid retirement plan with good choices and good education, that helps with the company’s overall success.”

Recession-proof?

Many expect the next recession any day. But experts say that expectation shouldn’t disrupt investment.

“There’s no way to predict the market,” says Hanson. “You want to look at it as a long-term situation. As you get closer to retirement, you want to be a little more conservative. But you don’t just flip the switch and get out of the market.”

That goes back to education.

Expecting change is almost always going to be part of your plan. Making hasty decisions based on talking heads on TV doesn’t make sense.
_{— Vance Gray}

“There are always going to be challenges, whether it’s a pending recession or job changes or changes to tax laws,” says Gray. “Expecting change is almost always going to be part of your plan. Making hasty decisions based on talking heads on TV doesn’t make sense.”

Gray says good education should be tailored to ensure investments are properly allocated along individual employee timelines.

“If you’ve got 20 years in the plan, you can perhaps afford a little more risk than someone with, say, three years,” Gray says.

Understanding allocations, in turn, helps people recalibrate their portfolios if a recession hits.

“Recessions happen,” Gray adds. “They create a lot of pessimism, because everyone is always expecting the other shoe to drop, as it did in 2008. But as long as you maintained a forward-thinking and educated understanding, and you don’t panic, you stand to potentially make more money in the long run.”