Setting Participant Goals: When 6% is too much
Many plan sponsors find that while the rule of thumb for retirement savings is to save between 10%-15% of salary, this number seems astronomical for most of their participants. Especially for participants that are further in their career, they may think “I’m never going to retire; I’m too far behind.” Here are a few tips on how to frame conversations with participants to encourage realistic savings rates and not scare them into inaction.
1. Retirement Income Calculators with Weekly Goals:
Encourage your employees to use retirement calculators that project a yearly/monthly difference in savings instead of the large number of total savings. If the difference between current savings and total savings goal in the next 15 years is $50,000, it might seem like an impossible task to meet. Use calculators that show the increase savings goal as $64 per week or 3% difference in savings rate.
2. Retirement Income Calculators that Allow for Outside Accounts:
Also encourage your employees to use calculators that will allow them to enter in other outside savings vehicles such as balances from other 401(k) plans and IRAs. This will give them a more comprehensive look at their total financial retirement situation.
3. Baby Steps:
If 10% is too much to start at, how about 5%? Or even 2%? Suggest that the participant put a note on their calendar each year to increase their savings rate by 1% or 2% each year until they meet your goal. Taking little steps will make a big difference in the long run.
4. Real Dollars:
Put percentages in real dollars. This may take more time to calculate, but especially when someone is participating in a plan for the first time, any amount coming out their paycheck may feel like a lot when in percentages. If 3% is really the cost of a couple cups of coffee each week, it might seem more manageable.
Framing retirement savings numbers in manageable amounts or a series of steps can encourage realistic savings goals and make a participant feel like they can achieve their goals.