Written by: Kraig Perlberg
Date published: May 16, 2017
Reading time: 6 Minutes
Saving for retirement throughout one’s working years is vital, and your retirement plan, whether it is a 401(k), 403(b), SIMPLE, SEP, 457, Defined Benefit, etc., is a great vehicle for employees to do so. However, employees often do not realize the importance of saving now, might believe they can’t afford to save right now or may choose to remove money prematurely to cover a current financial need in their lives. Other employees do realize the value of contributing to a retirement plan but are simply overwhelmed by the complexity of investing and choose not to do anything as a result. Consider the following suggestions to educate your employees and help them take full advantage of your retirement plan.
- Offer some financial education. Bring a financial advisor or representative from your retirement plan administrator to provide employees information about the importance of saving, the concept of compounding, how much they’ll likely need to live comfortably in retirement, different investment options and how just a small amount from each paycheck can make a significant difference.
- Make sure employees understand your plan. Investing in a retirement plan is confusing, and your communication strategies should make it as clear as possible for employees. If they don’t understand, they are more likely to make poor investing decisions or not invest at all. Employees should know if you offer a match (and how much you offer), the types of investments they can choose, fees associated with the plan, penalties for early withdrawal, vesting requirements, loan or hardship withdrawal options and all other relevant details. Consider providing written flyers or brochures, online or email communication, group meetings and one-on-one consultations.
- Offer target-date funds. These funds are a great option for employees with minimal investment savvy or who don’t want to manage their investment options on a continual basis. A target-date fund holds an array of stock, bonds and other investments, with the balance of risk becoming more conservative as retirement age nears.
- Consider automatic enrollment. Often, employees realize they should enroll in their retirement plan but just don’t take the time to do so. Automatic enrollment will give them the push they need. Also, it is a benefit for new hires because they are enrolled as soon as they are eligible, so they likely won’t miss the percentage deducted from their paychecks if it begins right away. Employees do have the option to change their contribution amounts or opt out of the plan if they choose.
- Offer a match if possible. Offering a retirement plan match is a great way to encourage employee participation. If you do offer a match, let employees know that not investing themselves is leaving free money on the table.
Regardless of where you choose to invest your money—cash, stocks, bonds, real estate or a combination of places—the key to saving for retirement is to make your money work for you. It does this through the power of compounding. Compounding investment earnings is what can make even small investments become larger given enough time.
You are probably already familiar with the principle of compounding. Money you put into a savings account earns interest. Then you earn interest on the money you originally put in, plus on the interest you’ve accumulated. As the size of your savings account grows, you earn interest on a bigger and bigger pool of money.