While some research suggests that the preparedness of U.S. employees for retirement improved slightly in 2013, there is still room for more growth in these numbers, particularly among younger employee populations, which, perhaps understandably, present some unique challenges. After all, with retirement looming so many years into the future—more than twice their age in some cases—and with lower disposable income levels at an early point in their careers, taking home more money is certainly desirable.
The challenge: providing equally compelling reasons for employees to make important investments for their retirement futures now.
The Impact of Demographics
One challenge for CUs is their unique employee demographics. The demographics of credit unions are slightly different from other types of organizations, notes Paul Chong, SVP/retirement plan solutions for CUES Supplier member and strategic partner CUNA Mutual Group, Madison, Wis. Notably, there tend to be more female than male employees, a statistic that has been shown to impact retirement readiness. In fact, a recent report from Financial Finesse includes a retirement preparedness survey, conducted by Transamerica Center for Retirement Studies, revealing that women’s median percentage of annual salary contribution is only 6 percent—25 percent less than their male colleagues’ contributions.
Age also has an impact on whether, and how much, employees decide to contribute to retirement savings, says CUES member Michael Daugherty, president/manager of $19 million/4,455-member Community Plus Federal Credit Union with nine full-time equivalents in Rantoul, Ill.
“Employees need to be putting away at least 10 percent [of their salary], if not 15 percent, into a 401(k) and very few are doing that,” Daugherty says. “This is especially troubling with younger employees—those under 40.”
The situation is, he admits, somewhat of a “do as I say, and not as I do” one. “I was guilty of the same thing,” he says. “I did not save as I should have as a younger person.” If he had, he says, the money would have compounded far more significantly, which is certainly a key benefit. Yet it is one that is difficult to thoroughly convey to employees whose line of sight to kindergarten is far closer than it is to their golden years.
In addition to hesitancy to enroll in these plans at all, Daugherty notes that younger employees tend to be somewhat risk-averse. “They tend to be a little too conservative,” he says.
At the other end of the spectrum are employees who are nearing retirement. “I think that they, generally, are putting more away,” he says. Still, if they didn’t start at a very young age they don’t get the same accrual value as a forward-thinking employee new to the workforce who contributes up to the maximum amount.
Somewhere between these two extremes, of course, is where most credit unions can hope to fall in terms of retirement benefits adoption by their workforce. And, there is another employee category that deserves special attention: credit union executives.
“The issue with executives is that because there are contribution limits for 401(k) and defined-benefit plans, they are in a different position than the rank and file,” notes Chong.
So, if the executive is aiming for that 80 percent of income level for retirement, the 401(k) plan will not get them there. “That’s why credit unions offer supplemental executive benefits plans,” says Chong. “They don’t have tax benefits. However, because they’re non-qualified, they can be discriminatory, which gives credit unions more flexibility to target the key executives that they want to attract and retain.”
Daugherty agrees that this is a group that deserves special attention. “Credit unions are doing some more creative things for their senior management,” he says.
One example is collateral assigned split-dollar, or CASD. These are basically loans made to the executives at a very low rate to purchase the plan; upon the employee’s death there’s a death benefit that will pay back the loan. “Even if the employee dies 30 years after they retire, the credit union does get that premium with interest,” Daugherty says. “The nice thing is that it is an asset owned by the employee, not the credit union.”
Communication and Education
Regardless of demographic or income level, communication is key to ensure that employees get the maximum value from their retirement benefits. Importantly, communication can’t be a one-time, or even once a year, event. It needs to be ongoing and immediate.
But how to make that happen?
At $1.4 billion/280,000-member Patelco Credit Union, with 593 FTEs in the San Francisco Bay area, SVP/Chief Human Resources Officer Susan Makris, a CUES member, says that recognizing the role employees play both in making their own retirement decisions and, potentially, in answering member questions or providing information, helps to provide a clear line of sight for all involved.
“As a financial institution, [financial] literacy is a strategic imperative for our members and so it becomes very important to be sure we build education and awareness for our team members,” says Makris. “They need to partner and provide advice to understand our members’ needs—we want to ensure that they’re as well informed as possible themselves.”
That begins upon hire, during orientation and onboarding. Patelco CU offers its retirement benefits to employees 21 years or older. The CU contributes 3 percent of employees’ salary to its 401(k) safe harbor program and also matches up to 5 percent of their base salary, both beginning on employees’ first day of employment.
Then, annually, during open enrollment, the CU does something unique. Rather than the traditional focus on health, dental and vision benefits, Patelco CU takes a more holistic approach to the concept of wellness, incorporating financial wellness into the mix.
“We talk about ensuring that you’re taking care of all aspects of your life,” says Makris. “That includes financial health.”
In addition, the credit union’s third-party administrator offers online support and webcasts and also provides additional information for employees so they can understand the impact of their choice of investment style.
The emphasis on communication and education benefits employees and helps them make good choices, but, as Makris emphasizes, it also benefits members, which is an important win-win.
There are certainly complexities involved in the choices that must be made by employees when participating in retirement plans. But, suggests Chong, three simple practices can help a lot:
Start Early. “The earlier you can participate, the better off you will be long term; if you wait, you can’t really catch up, so those early years are very, very important,” he says.
Diversify! Being properly diversified in terms of investment options is important, says Chong. “Some people may not understand the capital markets and they may be either too aggressive—putting all contributions in a small cap international fund—or they may be way too conservative and risk-averse—putting their money in just a money market which is returning almost nothing.” It is, he says, very important to diversify properly. Fortunately, he notes, most 401(k) plans have good diversification tools that can help.
Let It Sit! “There are ways to get a 401(k) loan,” Chong acknowledges, “but that’s a bad idea because it does set you back when you borrow against your own funds.”
Simple enough. But, Chong notes, “Most of the participants are doing at least one or two of these things and they should be doing all of them.” Credit unions can play an important role in creating an environment where retirement benefits are understood, valued and utilized.
Tips and Best Practice Insights
The easier credit unions can make it for employees to see the upside of contributing to their retirement plans and the less painful the process can be made to feel, the more likely employees will participate. There are, in fact, some simple things credit unions can do to ease the process.
For instance, says Daugherty: “Every year when we do salary adjustments my suggestion is always that employees split whatever their raise is and increase their 401(k) contribution by that amount.” For example, if an employee gets a 4 percent raise, she should increase her contribution by 2 percent.
That’s an important reminder. Most employees, says Chong, will contribute up to the employer match and then “forget about it,” he says. Credit unions can readily play a role here in reminding employees to review their contributions and consider increasing the amounts they’re contributing annually. As Daugherty suggests, a relatively pain-free time to do this is coinciding with their annual review and pay increase.
Automatic enrollment is another practice that is increasing in prevalence and even being mandated in some states, as Daugherty notes. “I’ve heard that the concept of automatic enrollment does help,” he says, noting that employees can always decline. For credit unions that may be switching from a defined-benefit to a defined-contribution plan, he suggests, the timing may be right to institute this concept.
Daugherty points to research that he recently heard presented at a conference by David C. John with The Heritage Foundation and the Retirement Security Project. In a 2012 study conducted by the University of Pennsylvania’s Wharton School and UnitedHealth Group with women, Hispanics and those earning less than $20,000 per year, rates of participation varied significantly between opt-in and opt-out (auto-renew) plans:
“I wish I had started that way,” Daugherty says, noting that his credit union has not instituted automatic enrollment.
Chong also cites auto-enrollment as an important best practice to help raise participation rates. “Everybody is automatically enrolled into the plan and has to consciously opt out, so inertia plays a big factor and you get more people participating,” he says. In addition to auto-enrollment, auto-increases can be another useful tool—again, capitalizing on the tendency toward inertia on the part of employees.
Patelco CU practices auto-enrollment (at 5 percent of salary) and it starts immediately upon hire. “Their very first paycheck they will see the pre-tax monies withheld,” Makris says. They’ll also see the 3 percent contribution the organization makes in the safe harbor account and the matching 5 percent. The impact, she says, “is as though they’ve received an 8 percent raise on day one.”
That early introduction to the impact, which tends to be far less than anticipated, is a good way to counter a common misconception about retirement planning held by both employees and members, says Makris—the belief that it is going to cost a lot more than it actually does. “Often times they just don’t believe that they can afford to save for their retirement today,” she says.
“When you automatically enroll an individual in the plan and they can physically see the dollar amount taken out on a pre-tax basis and what the actual impact is to their take-home pay, they’re often surprised. It isn’t until they’ve personally experienced it that they realize the benefit,” Makris explains.
Another important best practice, says Chong, is “really working with your plan administrator.” CUNA Mutual Group, for instance, works with its credit union participants to provide reports on participation rates, whether employees are properly invested and whether they’re on target to reach a secure retirement (which CUNA Mutual defines as 80 percent of income).
The tools offered by plan administrators can also be helpful as a means of communicating clearly and easily with employees and, in many cases, allowing them to calculate various what-if scenarios.
“For example, we have a ‘retire on target’ tool where, when you first pull up your account on the website, there’s a very simple graph and it says whether you are on target, or not, to reach your retirement,” says Chong. “If the answer is ‘no,’ it gives you one button to press to get you on track.
“Instead of giving you tons of different options that you don’t understand, we make it as simple as possible.”
Changing the Conversation
Typically, when it comes to conversations about retirement plans, the first question employees consider is “how much should I contribute?” Chong suggests flipping the conversation and looking at the issue differently.
“We’re really trying to change the conversation from the typical conversation,” he says. As employees contemplate their contribution levels, he notes, “they kind of lose sight of whether they’re going to have enough money to retire on.” That’s why CUNA Mutual Group has put in place its 80-percent recommendation as a target.
“The average employee is not going to be an investment expert. It’s going to be difficult for them to understand the dollar amount,” says Chong. Difficult, and often overwhelming. “If you’re making $35,000 and the website tool says you need to accumulate $1 million, you almost don’t do it because you think ‘how am I ever going to do that?’ But, if you just say you want to be on target to reach that 80 percent level, you just press this one button and we do all that work for you. You can kind of set it and forget it and all of the underlying assumptions will help you get there.”
That’s the kind of ease employees need to not only help them understand—but help them plan. At the end of the day that’s what it’s all about: helping employees make informed investment choices to help ensure a comfortable retirement, no matter how many years away that point may be.
“The best thing I would say is for credit unions to continually communicate with employees and encourage them to use the tools they’re provided,” says Chong. In addition, he notes, credit unions should emphasize the value that these tools bring and the benefits they provide. It’s a win-win, he says. “This costs the credit union money to provide and it’s a good benefit that they do want their employees to utilize to the full extent.”
Lin Grensing-Pophal, SPHR, is a freelance writer and human resource management and marketing communication consultant in Chippewa Falls, Wis. She is the author of The Everything Guide to Customer Engagement (Adams Media, 2014) and Human Resource Essentials (SHRM, 2010).