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“In the United States, 66% of Defined Contribution (DC) pension contributions go into target date funds (TDFs) and TDFs have now taken over as receiving the majority of DC contributions from US equity,” stated Sonya Uppal, Vice President of Defined Contribution and Retirement at Franklin Templeton Investments.
Most employers today have up to four generational cohorts of employees working for their organizations, each with very distinct characteristics. The career-focused, loyal and individualistic Baby Boomers (1946 – 1965) are on the tail end of their careers, or already retired, and will represent about 15% of the workforce by 2020. Generations X and Y are the largest generational cohorts in today’s workforce. Gen Xers (1966 – 1979), once deemed the “slacker generation,” are entrepreneurial, self-reliant and globally minded. Gen Y (1980 – 1995), or “Millennials,” are a generation as large as the Baby Boomers and are group-oriented, idealistic and socially conscious, says Trish Miller, Consulting Actuary at Willis Towers Watson. Gen Z (1996 – 2010) is the first generation that is “technology native,” and will likely have about 10 to 14 jobs before age 40.
So why is it important for employers to understand these generational cohorts? Because each generation is at a different life stage and has different concerns about their financial well-being and retirement savings. Boomers are largely concerned with protecting their assets so they don’t outlive their retirement savings. Gen Xers are still building their assets and are concerned with investment returns so they will have enough money to retire. Gen Y wants to spend money on experiences but many are still paying off student loans and other debt, so budgeting may be more important at this stage of their lives than saving for retirement, still many years away.
Many Canadians in the workforce are concerned about their financial well-being with 74% believing they are facing a less comfortable retirement than their parents and one in five states that financial problems are negatively impacting their lives. This should concern employers because employees who struggle with financial issues have higher rates of absence, are more stressed and less productive than employees without financial worries. Gen Y has the highest rate of financial worries and has higher rates of absence and presenteeism (about 13 days combined annually per capita) than Gen X or the Baby Boomers.
This productivity loss can total big dollars, says Dan Morrison, Senior Retirement Consultant at Willis Towers Watson. If we consider an example of 13 days lost annually for Gen Y employees, at an average salary of $50,000, that’s $250,000 per 100 employees.
What can employers do to help alleviate some of these financial pressures? Using Microsoft as a case study, Dan showed how one company simplified retirement planning for employees through the use of technology and plain language. Microsoft offers a defined contribution 401(k) plan with an employer match to its US employees. The company wanted to offer an attractive and “consumer grade” experience. Using Willis Towers Watson’s FiT Age concept, a retirement planning tool was developed which calculated a “FiT Age” by which the employee could retire at the same level of income, net of taxes and retirement savings. At the outset of the project, the average FiT Age was 71, which for technology employees is probably not a realistic age to retire.
In an example where an employee’s FiT Age was 74, the tool presents the employee with three simple suggestions:
So what were the results? The median FiT Age dropped by 1.6 years and 22% of employees that were contributing less than the full company match increased contributions by 84%. Employees also said they valued the long term perspective the tool gave them.
Dan says employees put a lot of priorities and interests like work, children, watching TV, etc. ahead of financial planning, so employees are more likely to engage in financial planning if they have simple tools that are user friendly, easy to understand and can help them make smart decisions about their future.
- Kenneth MacDonald
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