American employers may think they know what

Employee Interest in Enhanced Benefits Offers Marketing Opportunity to by Peter A. Welsh, JD, CPA Abstract: This article reports on the latest findings of the Transamerica Retirement Survey, an annual national poll conducted to gauge the level of knowledge of retirement planning options among executives and employees of America s small and midsized businesses. It reports a troubling disconnect between American workers retirement intentions and their current retirement savings patterns, as well as a lack of awareness on the part of business owners of their employees interest in company-sponsored retirement plans. These disconnects, as the author suggests, offer financial planning consultants a golden opportunity to market retirement plan products and services to their clients in the small to mid-sized business marketplace. This issue of the Journal went to press in June 22. Copyright 22, Society of Financial Service Professionals. American employers may think they know what their employees want when it comes to retirement benefits, but the findings of an annual survey conducted to gauge employee and employer awareness of, and interest in, retirement plans suggest otherwise. And therein lies opportunity for the nation s financial and retirement planning consultants. For the past three years, the Transamerica Retirement Survey, 1 commissioned to gauge the level of awareness of retirement planning options among both employers and employees in small to mid-sized companies, has identified a striking disconnect between what employees want and what their employers think they want. By misreading their employees minds, the owners of many American companies are missing out on an opportunity to protect their employees financial futures at the same time that they guarantee their own long-term economic security. When asked whether they would prefer a job with a higher salary but poor retirement benefits over a job that meets their minimum salary requirements and offers excellent retirement benefits, employee response to the 21 survey echoed the findings reported in the survey s first two years: a majority of full-time workers in companies with 1 to 5 employees would choose the job with better retirement benefits (57 percent in 21; Fig. 1). 2 That preference is higher among Baby Boomers (6 percent), but even the nation s Generation X workers are thinking ahead, with half of them responding to the most recent study expressing a preference for the job with better benefits. Baby boomers, it seems, are not 5 JULY 22 Journal of Financial Service Professionals

the only American workers who paid attention to the long-term impact of the stock market tumble of 2. Ask employers what their employees want, however, and the answer is quite different. Fewer than half (46 percent) of the employers surveyed in 21 expressed the belief that their employees consider retirement benefits very important, and three-quarters of them said that employees prefer higher salaries or other benefits (Fig. 2). It s no surprise then to learn that fewer than six in ten of these employers offer their employees any type of pension or retirement plan at all. It is important to correct this misperception on the part of American business owners to help them better meet the needs of their employees. Financial services consultants would do well to share these findings with clients and prospects, since the information can serve as a valuable conversation starter between consultant and client. Participation Rates High When companies offer their employees a retirement benefits package, participation rates are high: 79 percent of the employees surveyed whose employers offered a retirement plan in 21 reported that they were enrolled in the plan. The number changes little from generation FIGURE 1 Importance of Retirement Benefits Q. Suppose that two jobs come your way. Which one would you be more likely to choose? The jobs are almost identical except one has Excellent Retirement Benefits Higher Salary Total workers (n=5) Generation X (n=153) Baby Boomers (n=272) 34% 36% 45% 49% 57% 6% FIGURE 2 Importance of Employee Benefits Q. Please tell me how important you think that benefit is to your employees (%very important). Companies offering each option 1 8 83% 81% 62% 6 46% 4 2 18% 15% 13% Health Paid Paid sick Pension or Stock options Disability Life insurance vacation leave retirement plan plan insurance insurance Journal of Financial Service Professionals JULY 22 51

Employee Interest in Enhanced Benefits Offers Marketing Opportunity to to generation, with 8 percent of Baby Boomers and 76 percent of Generation Xers enrolled. It s not even necessary for employers to offer a company match. Two-thirds of workers reported in 21 that they would be likely or somewhat likely to participate in a retirement plan, even if they were offered no employer match for their contributions (Fig. 3). Their interest in participating more than doubled, however, when a company match of any size was proposed. Not only are American workers interested in access to a company-sponsored retirement plan, they re also willing to do some of the saving themselves. Sixty-one percent of respondents reported in 21 that they already were saving for retirement outside of the workplace through either an IRA or mutual fund, and 55 percent said they also were participating in a company-sponsored plan. But not all workers are building their nest eggs. Fully 39 percent reported saving nothing for retirement outside of work during 21, and 14 percent of all respondents hadn t yet saved a dime toward their retirement (Fig. 4). And even though nearly nine in ten workers agreed that people in the United States don t save enough money to live comfortably throughout retirement (86 percent), a surprisingly high 68 percent of workers reported that they plan to retire before the age of 65. That expectation seems to fly in the face of reality, given that its likely basis was the boom market of 1998 and 1999. In today s market, it would be more realistic to assume that American workers are taking extra multivitamins and exercising at every opportunity, since it s more likely they ll have to work until age 8 than be able to retire early. It s possible that this discrepancy between dream and reality has developed because many American workers just don t know how much they ll really need to retire comfortably. Only 18 percent of the employees surveyed said that they think they will need $1 million or more to ensure a secure retirement, 24 percent think they ll need between $2, and $1 million, and 15 percent put the figure at less than $2,. Those who said they d need just $2, to retire were much more likely to admit that they had done no formal calculation but had just guessed at the amount, as were those with lower average household incomes. And fully 4 percent of the respondents admitted that they had no idea how much they will need for their golden years (Figs. 5 and 6). When it comes to knowledge of the recent tax law FIGURE 3 Interest in Company Retirement Plan Q. If your company offered a retirement plan that allowed tax-deferred contributions, with no matching/some matching contributions, how likely would you be to contribute to the plan? 8 Total workers whose company does not offer a plan (n=143) 75% 7 6 No Matching Matching 5 4 36% 32% 3 2 1 8% 19% Very Somewhat Not too Not at all Very Somewhat Not too Not at all likely likely likely likely likely likely likely likely 17% 1% 5% 52 JULY 22 Journal of Financial Service Professionals

changes, neither employees nor employers seem familiar with the Economic Growth and Tax Relief Reconciliation Act of 21 (EGTRRA): just 3 percent of employers said they were very familiar and 25 percent somewhat familiar with the act and its provisions, while 3 percent of employees were very familiar and only 19 percent somewhat familiar. FIGURE 4 Saving for Retirement Outside of Work Q. Are you currently saving for retirement outside of work, such as in an IRA or mutual fund? 8 7 6 5 4 3 2 1 (If No) Yes Total (n=5) Generation X (n=153) Baby Boomers (n=272) Q. Do you currently have any money saved for retirement? (n=95 workers not currently saving for retirement) 1 8 6 4 2 61% 54% 63% 29% 6% Yes 38% 71% 46% No 94% No 37% 62% FIGURE 5 U.S. Retirement Savings Behavior Q. In general, do you think that people in the U.S. save enough money to live comfortably throughout retirement? Yes, most do Mixed, some do, some do not No, most do not *less than.5% * Total workers (n=5) Generation X (n=153) Baby Boomers (n=272) 3% 3% 8% 5% 14% 81% 86% 88% Closing the Information Gap Even among those employers who reported having heard about one or more of EGTRRA s provisions, only one-third (34 percent) had looked into how their company s retirement plan might benefit from the changes EGTRRA permitted as of August 21, when the survey was conducted. And only 3 percent of those had discussed taking any specific action. It seems that employers don t fully understand the value of the new law, since nearly half (47 percent) had heard of the provision for increased limits. They were less informed of the changes to the definition of key employees for plan testing purposes (2 percent), the faster minimum vesting schedule (19 percent), and the tax credit for the administrative expenses of setting up a new plan (22 percent of those currently without a plan; Fig. 7). A more recent look at employer response to EGTRRA, taken in the first quarter of this year by Transamerica Retirement Services, suggests that employers who already had established retirement plans are tak- Journal of Financial Service Professionals JULY 22 53

Employee Interest in Enhanced Benefits Offers Marketing Opportunity to things. Only one-fourth (24 percent) of plan participants currently contribute 15 percent or more of their salary to a company retirement plan, and only 22 percent expect the amount they contribute to increase significantly over the next two years. That lack of commitment can likely be blamed on the fact that, for many lower-paid employees, there s just not enough left in the bank after paying necessary expenses to commit additional funds to retirement. And that s the likely reason that so many company plans have trouble passing discrimination testing; if employees at the lower end of the pay scale can t afford to set funds aside in the company s retirement plan, the level of participation is skewed toward higher-paid workers. One way for employers to encourage retirement plan participation by employees at all rungs on the pay ladder is to offer an employer match. It s much tougher for people to say no to the plan when they know that whatever they save, up to the percentage limit, will be doubled thanks to the employer match. It gets entry-level employing full advantage of the law s provisions. Ninety-five percent of employers who have signed EGTRRA plan amendments with the company signed on for rollovers; 91 percent elected to offer the catch-up provision to their 5-and-older employees; and 71 percent increased their deferral limits. Hopefully, this suggests that the retirement plan gap long experienced by employees of small and mid-sized businesses is closing, and closing quickly. Clearly, the interest in plan participation is there. Among employees surveyed in 21, 46 percent knew that EGTRRA allows them to save more money each year, but only 2 percent had heard about the catch-up provision which enables over-5 workers to put extra funds into their retirement accounts to compensate for earlier years in which they weren t contributing. But, of those who did know about these advantages, a majority said they intended to take advantage of the opportunity with 66 percent saying they would save more each year and 56 percent saying they would utilize the catch-up provision (Fig. 8). But intention and action seem to be two different FIGURE 6 Expected Retirement Savings Required Q. How much money in total do you think you will need to have saved by the time you retire to feel secure? Total workers (n=5) 5 41% 4 3 2 1 5% 1% 13% 11% 8% 1% Under $1, to $2, to $5, to $1 million to $2 million + Don t Know $1, $199,999 $499,999 $999,999 < $2 million 54 JULY 22 Journal of Financial Service Professionals

ees started on their retirement savings, and builds a stronger bond between employee and employer in the process. Another solution is to offer a profit-sharing benefit to all employees. No matter what their rate of pay, if employees are doing their jobs and doing them well, they re contributing to the bottom line. Rewarding that effort with a share of the profit gets every employee involved in the retirement plan, helps younger workers to start thinking long-term about their financial futures, and boosts the sense of commitment they have to the company for which they work. Marketing Opportunity for With the advent of EGTRRA, financial consultants have a golden opportunity to tell clients why now is the time to establish new company retirement plans or to update the plans already in existence. Although the Transamerica Retirement Survey reports that workers of all ages claim to be significantly involved in monitoring and managing their retirement savings (71 percent), two thirds admit that they do not know as much as they should about investing (65 percent overall, 71 percent of Generation Xers, and 62 percent of Baby Boomers). Anecdotal evidence, culled from years of working with employers, suggests that they are not much better off than their employees. While the owners of most firms claim to know a lot about investing, it s far more likely that, while they do know a great deal about their own business or professional practice area, they merely think they know a lot about investment strategy. And that s where the professional financial consultant can, and should, step in. By educating both employers and employees about the ins and outs of asset allocation and diversification and about how to gauge the relative risk of various types of FIGURE 7 Employer Awareness of Tax Changes Q. Which of the following changes have you heard about? (% yes) (n=2 employers) 5 47% 4 3 2 29% 25% 22%* 2% 19% 1 Increased Less restrictive Provisions for Higher A tax credit for Changes to the A faster annual limits requirements additional employer administrative definition of minimum for pre-tax for rollover catch-up deduction expenses of key employees vesting retirement contributions contributions limits for profit- starting a new for plan testing schedule plan deferrals by employees sharing plans plan purposes age 5+ *Only asked of employers without a current plan (n=86). Journal of Financial Service Professionals JULY 22 55

Employee Interest in Enhanced Benefits Offers Marketing Opportunity to investments, financial consultants serve as more than administrators. They become partners in their clients effort to establish and maintain a retirement plan that maximizes benefits to employers and employees alike. They become a valuable resource in their clients quest for long-term financial security. Combining that consultative service with such tools as retirement calculator software and Internet-accessible information on investment planning provided by objective outside sources, as well as one-on-one meetings of individual employees and outside providers of investment information and advice, will help put more Americans on a sure path toward retirement security. When more employees participate in corporate retirement plans, the asset value of those plans will grow, giving employers more purchasing power. And as the number of companies offering retirement plans grows, the long-term economic security of individual Americans will grow as well. Surely, these are goals toward which financial consultants will be eager to steer their clients, as they rep- resent a win for every party involved in the retirement planning process. Peter A. Welsh, JD, CPA, regional vice president of top-ten 3 retirement services provider Transamerica Retirement Services, manages the company s central region from Chicago, IL. Welsh earned his undergraduate degree at the University of Notre Dame and his law degree at Indiana University-Indianapolis. (1) The 21 Transamerica Retirement Survey was conducted by the research firm of Mathew Greenwald & Associates. The poll surveyed 5 workers and 2 employers in August of 21, with a margin of error of 4 percentage points for workers and 7 percentage points for employers. (2) Charts and figures in this article are taken from the 21 Transamerica Retirement Survey, 21 Transamerica Life Insurance and Annuity Company. (3) Transamerica Retirement Services ranks as a top-ten retirement services provider based on data published in CFO Magazine s April and May 22 reports titled CFO Buyer s Guide: 41(k) Providers, as well as Treasury and Risk Management s May 22 41(k) Buyers Guide. This ranking is derived from data on the total number of plans managed by investment companies reporting over $8 billion in 41(k) assets. FIGURE 8 Workers Expected Use of New Provisions Q. Do you think you will take advantage of this provision? (Workers aware of each provision - % yes) Total workers (n=5) Generation X Baby Boomers 8 7 66% 69% 67% 62% 6 56% 52% 5 45% 4 34% 33% 3 2 1 Increased limits for Tax credits for Provisions allowing people to Provisions allowing how much you can save low income workers who consolidate different types of catch-up contributions for each year in a tax-deferred save for retirement tax-deferred retirement plans people age 5 and older retirement plan into a single plan 56 JULY 22 Journal of Financial Service Professionals

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