Efficient retirement programs: crucial for financial wellbeing

Employee mental health and financial wellbeing have never been more important to business. In fact, organizational success, whether it be that of a government, corporation, not for profit or even a school, depends on employees’ wellbeing.

Financial wellbeing and mental health have a direct impact on an organization’s ability to achieve its goals and its bottom line. We believe that human resources (HR) will prioritize financial wellbeing strategies in the years to come. Here are the three main reasons why.

First, our research shows that financial wellbeing of a workforce is a strong driver of mental health and wellbeing. More and more employers understand and agree that employees’ total wellbeing has a direct effect on their concentration, innovation and collaboration. Ultimately, these elements play a part in their customers’ experience.

Secondly, our research confirms that benefits and pensions are important to employees’ decisions to join or stay with an organization. One in two people will leave their jobs in the next 12 months due to a perceived lack of benefits and one in three would leave for a guaranteed income pension. Contrary to popular belief, these results are not just true for older cohorts; even employees aged 18 to 35 are paying increasing attention to these aspects. The bottom line is impacted: financial stress, being a highly correlated driver of poor mental health, shows up with a rather significant negative impact on productivity equivalent to greater than 30 days lost per year which is roughly equal to one-twelfth of an organization’s total payroll spend in a year.

With the competition for talent intensifying and increasing focus on bottom line results in challenging economic environments, companies with integrated total wellbeing strategies, and not just simply a collection of traditional programs, are poising themselves to hire the best talents and deliver enviable results for their shareholders.

Thirdly, companies that are examining their HR strategies and adopting a strategic vision promoting total wellbeing support demonstrate positive social impact for their employees and communities, a key driver in their ability to demonstrate the social aspect in their corporate environmental, social and governance (ESG) strategy.

Wellbeing versus retirement. An impossible choice?  

Today’s economy is presenting both challenges as well as opportunities for defined benefit plan sponsors and for those participating in capital accumulation plans (CAP). In fact, some may argue the challenges for CAP members are nearly insurmountable and there is significant vulnerability in the workforce as a result. Three in 10 are digging into savings to maintain their standard of living and being increasingly concerned about their ability to continue to do so.

Employees continue to buckle under the pressure of high interest rates, housing affordability and inflationary pressures on their ability to save for retirement and pay down debt. The situation is hard for 35-year-olds and younger, but it is also impacting 55-year-olds and older who are voicing concerns about having to delay their retirement the longer that inflationary pressures persist.  

An employer may ask: “Isn’t it enough to offer a retirement program with a competitive contribution formula? After all, retirement programs are likely the most prominent component of financial wellbeing strategies currently being offered.”

But with retirement so far in the future for most who are struggling with the financial pressures of today, it is not surprising that employers are looking for ways to reposition and leverage their retirement programs. We would like to propose that those retirement programs be an anchor for a more holistic financial wellbeing strategy that can better adapt to changing priorities and needs of both employees and the organization.

Employers are shifting focus

It is already well understood among employers that the correlation between financial wellbeing and overall total wellbeing is undeniable and that, in turn, it has an impact on the productivity and turnover of a workforce. At the same time, it is increasingly recognized that impactful financial wellbeing strategies must go beyond traditional retirement programs to meet the diverse needs across a population that is rarely homogenous and whose members are not always participating in the retirement program offered.  

By analyzing the data, we can highlight what these needs are opportunities to be seized: adopting strategies and designing programs to enable support for shorter and midterm financial priorities, while not necessarily sacrificing retirement outcomes.

Employers are increasingly looking– not just in Canada, but in the UK and US as well – to explore ways to leverage their retirement programs as anchors for a more comprehensive financial wellness strategy that resonates with today’s workforce.

The first step is evaluating how the retirement program can be leveraged to achieve positive financial wellness outcomes for a greater proportion of the workforce. Then, they need to figure out how their retirement program could be made more affordable and effective in helping members to achieve retirement income.  

In today’s economic environment, workers are facing financial pressures and uncertainty not seen before. The dream of a financially secure retirement seems out of reach. Simply contributing more is often the quick answer to how to improve retirement readiness but it isn’t often the most practical solution for an employer or an achievable solution for an employee, especially when every dollar counts.

Employees and employers alike need their contributions to go further. There are many levers that can be pulled to improve efficiency of a retirement program. The levers that have the most impact are plan design, net of fee investment returns and longevity pooled decumulation options. Other components that should not be overlooked: effective governance, robust member decision support tools and tailored administration and communication that facilitates it all.

Seizing opportunities which benefit financial wellbeing

Thanks to proprietary, sophisticated modelling and analysis tools, we can capture those opportunities for the benefits of both members and the sponsor. Achieving efficiency can seem aspirational or unachievable. However, providing a more affordable retirement income – even in incremental steps – often presents a path for employees and employers alike to think more strategically about how to allocate their dollars to achieve greater overall financial wellbeing.

To demonstrate how efficiency could be improved and how an individual could then think how to reallocate their retirement savings dollars, let us take the example of a decumulation feature incorporated through plan design.

The cost of self-insurance as an individual trying to secure a retirement income that is sustainable for their lifetime is extremely high due to many factors:  investment returns, inflation and longevity or life expectancy, to name a few. Even more, when the individual can accumulate assets within the structure of their employer’s retirement program but not receive their retirement income from it, they face considerable challenges to manage the risk of outliving their assets: loss of access to the investments, loss of access to the employer negotiated group fees, loss of access to the benefits of the employer’s governance, communication and education support and lack of guidance on how to convert their savings into an income stream.  

Plans such as these – accumulation focused only – consequently require higher contributions from members who are trying to prepare for retirement. In comparison, other programs do offer a decumulation feature through either a company sponsored Group Life Income Fund, Registered Retirement Income Fund, Variable Benefit or some combination thereof.    

Allowing a 35-year-old member to continue to remain invested in the company program investments through decumulation rather than a transfer out of assets to retail investment options would produce the same retirement income as if that member had contributed 2% more per annum throughout their entire working career. Put another way, a plan which efficiently converts accumulated assets into retirement income would allow the 35-year-old member the opportunity to consider reallocating 2% of earnings (before tax) to other financial wellness priorities rather than their retirement savings. Still with that plan, if the same member instead chose to maintain their contributions at the higher level regardless, they would then enjoy an enriched or prolonged retirement outcome as a result, versus the retail solution.

Improving financial wellbeing, boosting the value of a retirement program and reducing its costs are even more profitable when programs go further and can offer features like Variable Payment Life Annuities, Advanced Life Deferred Annuities or even investment products, like the Longevity Pension Fund by Purpose Investments. These solutions help members effectively pool longevity risk amongst a group and convert their accumulated retirement savings into a pension for life. In this way, longevity risk can be more effectively managed enabling members greater flexibility to consider a more diverse set of financial priorities during their working years without having to necessarily accept delayed retirements or diminished retirement standards of living. This means that everyone wins: employees have the financial wellness programs that help them and employers improve overall wellness across their workforce.

Retirement programs are the solution

Whether looking to retain valued employees in their workforce or attract new talent, employers need to understand that an effective retirement program is highly valuable and sought after by employees. When done efficiently, as well as contributing to overall wellness, it helps them prepare for retirement affordably while allowing room to address other shorter term financial priorities.

Click here to learn more how TELUS Health can help plan sponsors design and deliver effective wellbeing strategies. 

This article has been authored by Michelle Loder, Vice-President Defined Contribution Consulting, Retirement and Benefits Solutions.