The war for talent has grown more and more competitive every year. As advisors, we continue to encourage our clients to view attraction and retention as critical components of their firm’s culture and strategy. While most organizations have made steps to formalize such a strategy, few have integrated their approach across all of their total rewards platforms. Most human resource professionals would agree that an employee’s compensation is more than the “cash” they receive. Paid time off, insurance, retirement programs and the like all must be aggregated and presented as a “total reward” the employee receives in exchange for their service. Again, many employers agree and have created statements that show an employee the complete investment the firm makes on their behalf in exchange for the hard work. The issue, however, is that while many organizations view the numerous platforms they provide to employees in exchange for their work as aggregated, they fail to take a 360 degree view of these programs when making changes to them. This is especially true when it comes to retirement programs and health and welfare benefits. All too often, changes are made to one program without full consideration of what impact that might have on the other. As we examine the ramifications of some of these decisions, we can arrive at reasonable conclusions that suggest we should be more careful about how some adjustments to distinct pieces of a total rewards program can have ripple effects on other parts of the platform.
Gallup has conducted polls since the early 1990s around the expected and actual age that Americans retire. Its first poll, in 1991, showed an average age of retirement among retirees of 57. As of 2014, that average age had risen to 62. Further, the expected retirement age among non-retired Americans had hit an all-time high of 67 in 2012. Interestingly, 11% of Millenials polled expect to retire before age 551. As the generational cohort’s age increases, their belief that they can retire before 65 diminishes rapidly. We can conclude that Millenials then have the hope that a retirement age similar to those who retired in the 1990s is still possible. Are they naïve to believe they have any chance of retiring before 65?
Since 2008, many organizations have adjusted their retirement programs in an effort to reduce costs. Some very large firms discontinued matches or eliminated 401(k) plans or pensions entirely2. While some of these organizations have reintroduced matches or programs, many times the benefits upon reintroduction were not as strong. According to a survey by American Investment Planners, 42% of 401(k) plans had no match at all in 20113. A Bloomberg News article in 2014 found that of the plans that cut matches after 2008 but have since reinstated the benefit, 23% had a reduced benefit compared to pre-20082. An Employee Benefits Research Institute report found that a decrease in an employer match by just 3% (assuming a conservative return on investment) would calculate to a difference of over $812,000 over the course of a career for a 25 year old starting at a $25,000 salary2. Given these findings, isn’t it likely that hopeful Millenials won’t retire before 55, but instead we would see the average retirement age continue to increase? How will that impact the rest of our total reward programs?
A study conducted by the National Center for Biotechnology Information determined that the average expenditure of a typical American in healthcare across their lifetime was $316,579 in 2000 dollars. Carried forward, that would be $441,690 in 2015 dollars. This study is widely cited in numerous articles and subsequent studies for its analysis of the distribution of this spend across a person’s lifetime. Among other findings, the core revelation was that 79.6% of a person’s typical lifetime expenditure on healthcare occurs after the age of 404. We also know, thanks to the Bureau of Labor and Statistics, that in 1992 the median age of the American worker was 37.1. In 2012 it was 41.9 and is projected to be 42.6 by 2022. Remember, the average retiree age in 1991 was 57.
As an employer faced with ever increasing costs surrounding the healthcare provided to your employees and their dependents, what do we do now? We know nearly 80% of costs in a person’s lifetime occur after age 40. We know that the average age of retirees continues to increase, but that Millenials just entering the workforce still have a goal of retiring before 60, just like employees did over two decades ago. To truly create valued, meaningful rewards platforms we must then be comfortable reallocating health and welfare dollars into retirement plans where appropriate, not for the benefit of the retirement program, but rather for the long-term efficiency of a medical plan. When we realize how truly integrated all of these programs are and better understand the ripple effect one tiny change can have, we design stronger, more valuable rewards programs that resonate with our employees in much more important ways.
For more information on these and related topics, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
