At an MMA seminar this fall, guest speaker Hugh O’Toole from MassMutual posed this question to CFOs, HR professionals, and others regarding their organization’s employee retirement program:
“What if I could show you we could decrease employer liability solely by increasing employee funding?”
First, Mr. O’Toole set about connecting the financial side of the business (CFOs, et al) with the “people” side of the business (HR). After all, HR’s job is to help employees; the CFOs task is to be fiscally responsible on behalf of the organization.
How do you align the two? O’Toole interviewed 50 CFOs for private companies, non-profits, and government agencies to see if he could convince them how important their employee retirement plan is to the employer.
It took an average of twenty minutes before the CFO would stop O’Toole with similar statements: “I know you want to help, but I can’t for the life of me figure out the business purpose of our defined contribution plan.”
According to O’Toole, you have to begin by understanding the profound demographic shifts coming our way. A lot of baby boomers will be eligible to retire soon (10,000 are turning 65 every week), but far too many of them are “financially unprepared.” They’re trapped. They don’t want to retire, because they can’t afford it.
Another converging factor to consider is the rise in healthcare costs. Add to that a fragmented employee benefit experience and you have a situation that may seriously affect employer viability over the long term.
Employers are shifting from being a benefits funder to being a benefits facilitator. What that means is, as this financially unprepared workforce hits retirement age, there will be a significant potential financial liability as they continue to work.
And that doesn’t take into consideration the lack of engagement and productivity that can result when financially unprepared employees stay at their jobs – not because they want to, but because they have to. This lost engagement and focus can be even more dangerous and cause extra liability in certain industries, such as trucking.
O’Toole emphasized that his comments by no means support the idea of forcing retirement age employees out the door. Quite the opposite. Older, more experienced employees are the “culture keepers”; they act as mentors; and they can contribute a lot if they’re engaged and want to continue working.
Every organizational culture is an eco-system that includes healthcare, protection, and retirement.
With only two key pieces of data, O’Toole and his team can create a cost summary of a company’s workforce, including cost of benefits. From there, they can chart a company’s current plan retirement readiness distribution model and juxtapose it against a proposed plan readiness distribution.
They can then demonstrate the marginal costs of delayed retirement by assessing the company’s workforce costs – hiring a new employee at lower wages with significantly lowered healthcare and worker’s compensation costs. That cost differential is key to establishing the employer’s cost of an employee delaying retirement.
If an employee feels financially well and retires at, say, age 65, rather than 68, a company can save in excess of $100,000.
Best of all, O’Toole was able to demonstrate with data that by auto-enrolling 100 percent of the employee population and then auto-increasing the contribution by 1 percent each year (capping it at 10 percent), the organization was stronger and more viable.
In other words, decreased employer liability from increased employee funding.
It’s important for organizations to remember that they have essentially two main components – technology and people. That’s why retaining capable, culturally-oriented employees is key to the success of any company. That includes helping them to be, and feel, financially prepared. It’s a matter of Human Capital Management.
Company retirement plans are not simply a good idea – they are critical to the business, and it is critical that they work. Retirement plans are a major lever in wage, healthcare, and worker’s compensation costs. And they are significant in attracting and retaining key employees.
Human capital management isn’t just about retirement. It’s the intersection of benefits, property and casualty, and all manner of things you didn’t even consider to be benefits, such as savings accounts.
But it is important to focus on making certain employees are financially well; that they can retire on their own terms. Because that enhances your viability and helps the organization be stronger.
To watch the entire video of this presentation and learn more about quantifying the potential cost of a workforce that is unable to retire on its own terms and how to reduce those costs, Click Here.