Knowledgeable employers understand that financial wellness is a critical component of employee well-being.
Fortunately, you can improve the financial health of your employees. When you do, there are significant benefits for everyone.
The importance of financial wellness
A highly stressed employee is likely to be less productive.
According to the American Psychological Association (in a 2015 report), 72% of adults reported feeling stressed about money at least some of the time.
Stressed-out employees bring their concerns to work, reducing their productivity and increasing absent days from work. 73% of employees say that their financial worries severely impact their productivity at work.
What employees want
Employees – especially younger employees –want their employers to provide benefits like retirement planning, credit card monitoring, and financial literacy training.
One survey found that employees 25 and under are twice as likely to prefer financial planning services as employees 56 or older.
The same survey found that most employees of all ages wanted 401(k) matching, standard of living raises, and performance-based pay.
Retirement plans are critical
A retirement plan is a savings account that allows individuals to save for retirement while receiving tax benefits. Plans offered by employers are typically 401(k) and 403(b) plans.
A 401(k) plan is a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. The contribution amount is excluded from the employee’s taxable income. Employers may (but are not required to) make matching contributions to the employee’s account.
Distributions, including earnings, are includable in taxable income at retirement and taxed at the employee’s marginal tax rate on the date of distribution.
A 403(b) plan is a retirement plan offered by public schools and qualified tax-exempt organizations. It works in the same manner as a 401(k) plan.
Offering a retirement plan is the minimum employers need to do to energize employee health, engagement, and performance.
Benefits of Offering Retirement Plans
A retirement plan provides both the employer and employees with numerous benefits, including:
Attract and Retain Talent
Employers need help attracting and retaining top talent in this tight labor market. According to a 2021 PwC survey, 65% of employees are considering leaving their current employer.
Lack of benefits was the second most important reason (after compensation) for leaving.
The availability of a retirement plan was cited by 62% of those surveyed as an important consideration when deciding to accept a new job or stay in their current position.
Both employers and employees receive tax benefits from retirement plans.
Employer contributions are tax-deductible.
Assets in the plan grow tax-free.
Contributions by employees can reduce taxable income.
Contributions and investment gains are taxed once distributed.
Retirement plans help employees save for retirement and provide financial security when they no longer have income. Employees can reduce their reliance on Social Security benefits by contributing to a retirement plan.
Many employees don’t fully understand that their retirement can last 30 years or more or that they may need up to 80% of their current annual income to retire comfortably.
Employees relying on Social Security benefits may be surprised that the average benefit is only $1,200.
Higher Employee Contributions
Retirement plans often offer higher contribution limits than individual retirement accounts allowing employees to save more for retirement. This is especially true for employer-sponsored plans, where the employer may match employee contributions up to a certain percentage of their salary. These matching contributions can significantly increase the amount of money employees save for retirement.
For 2023, the 401(k) contribution limit for individuals is $22,500 or $30,000 if you are 50 or older.
In contrast, the maximum an individual can contribute to a traditional IRA in 2023 is $6500 or $7500 if you are 50 or older.
Retirement plans can alleviate financial stress by providing employees with a tax-advantaged savings benefit that will accrue in value over time.
Employers can increase the value of this benefit by electing an automatic enrollment option in the plan.
Automatic enrollment allows an employer to automatically deduct elective deferrals from an employee’s wages unless the employee chooses not to contribute or contribute a different amount.
Importance of financial education
While offering retirement plans to employees is essential, educating them on retirement planning is equally crucial.
Employees who lack basic financial literacy may not understand the importance of saving for retirement – especially at an early age.
Educating employees on retirement planning can help them make informed decisions about their financial future. This is particularly important for younger employees who may not have had the opportunity to learn about personal finance and investing in school.
Educating employees on retirement plans can help them understand the benefits they offer and how to make the most of them. For example, employees who understand the power of compound interest may be more likely to contribute to their retirement accounts, knowing their contributions will grow over time.
Combining a retirement plan with an employer match and a program offering financial education and support fosters a happy, engaged, and productive workforce.
At Allied Integrated Wealth, we help business owners set up retirement plans and offer financial education and support to their employees. It’s part of our comprehensive financial planning services.