Think Twice - Let's Teach Employees to Retire

Some employees have convinced themselves that the beloved 401(k) will rescue them like Prince Charming. A nice thought, except that it's not true.

June 20, 2002

A funny thing is happening to the idea of retirement. It's disappearing.

We've already heard the horror stories about Social Security -- stuff about how the retirement of the baby boomers will strain the system, and how more Gen-Xers believe in UFOs than in the possibility that they'll ever see a Social Security check.

Still, some employees have convinced themselves that the beloved 401(k) will rescue them like Prince Charming. A nice thought, except that it's not true. Here are a few of the problems:

  • Some employees aren't participating. Some people work at companies that don't have 401(k)s in the first place. At companies that do have 401(k)s, about 25 percent of employees don't participate, according to a Hewitt Associates survey.

  • When they do participate, they're not putting in enough money. This is a biggie. The single most important way for people to improve their chances of actually retiring is to save more, says Dallas Salisbury, president of the Employee Benefit Research Institute, probably America's most respected research institution in the benefits field. "We in the United States have never saved enough," he says. "We are doing better, but are still far short of what is needed to reach goals." The problem is particularly bad for younger and lower-salaried employees.

  • They're not diversifying. Yes, you hear a lot about diversifying, and it sounds nice, but is that what people are really doing? Not really. In plans with 5,000 or more participants, more than 43 percent of assets are in the stock of the employee's company, according to the Profit Sharing/401(k) Council of America. This means if the company goes kaput (see Enron), the employee is not only out of work but also short a good portion of his or her retirement savings. Lovely.

The current 401(k) system has a number of other shortcomings, including the fact that many employees just cash out their money when they switch jobs, blowing their retirement savings altogether and generating a big tax bill.

You might say, "Retirement looks pretty bleak for the younger generation, but at least the baby boomers are prepared."

Another nice thought, but not true. The baby boomers are totally unprepared for their retirement, and their kids are going to spend their dough helping out their parents. The Allstate Financial Group says that baby boomers have saved an average of approximately $120,000 -- only 12 percent of what they'd need for a 20-year retirement. On top of that, about three out of five boomers will be in debt when they retire.

So, what's the solution? Should we not retire? Good idea, but that's usually not possible either.

"You may think you can just keep working, but disability rates get high with older ages, and working may not be an option," Salisbury says. "You may have to 'retire' with no money because you cannot physically work."

What can HR do? Well, what this boils down to is education. We created this private retirement system for employees, but they don't really know how to use it.

There are lots of good retirement-planning checklists and worksheets in print and online. Hunt them down and put together a set of links for employees.

Also, you can explore the idea of giving employees a voucher for financial counseling. That will help them and relieve you of some of the worries of liability if you're giving them advice.

Most important, you can train employees in retirement planning. Of course, like many other HR professionals, you may be worried that if you try to help employees, and they end up losing money, they'll turn around and sue your company.

Senators Jeff Bingaman, a New Mexico Democrat, and Susan Collins, a Maine Republican, want to calm your fears. Their bill, S.1677, would allow HR people to bring in investment advisers without being liable for investment advice given by those advisers. The advisers would have to meet certain criteria, such as being registered in your state.

The Small Business Council of America and the American Association of Retired Persons both support the bill. Call your two senators at (202) 224-3121 and tell them that you, too, want the Bingaman/Collins Independent Investment Advice Act of 2001 to become law.

Worried that your phone call won't make a difference? You may be right, unless you tell your senators how much revenue your business brings in, how many people your business employs, and how much you want to help those employees retire. They'll listen to that.

Workforce, February 2002, p. 80 -- Subscribe Now!