Financial wellness of employees has emerged as a top priority for employers in recent years, but too many workers are still struggling to improve their financial health.

According to the MassMutual Workplace Financial Wellness Study, eight out of 10 retirement plan sponsors believe their employees have financial difficulties, and 67% of sponsors are concerned about their workers’ financial readiness for retirement. The survey also revealed that 46% of plan sponsors worry that worker participation in their sponsored plans isn’t as high as they would like.

For sponsors taking an active interest in promoting and improving employee financial wellness, the major challenge remains effectively quantifying the benefits of their programs. Just how much have your financial wellness efforts strengthened employees’ overall financial security, or increased their readiness for retirement?

Financial wellness can be complicated to quantify because employees have different financial goals and personal circumstances. Identifying the status of an employee’s overall financial well-being involves obtaining a good understanding of their living situations, expenses and spending habits in order to find out how much they need to save to achieve a financially secure retirement. This can be time-consuming, especially for larger organizations, and could also be considered intrusive by some participants.

To help participants improve their financial wellness by increasing their retirement savings, sponsors can promote their plans as havens where employees can consolidate and grow their 401(k) savings.

Auto portability – the routine, standardized and automated movement of a retirement plan participant’s 401(k) savings from their former employer’s plan to an active account in their current employer’s plan – can significantly streamline the process of completing a roll-in transaction for employees as soon as they join a new employer.

Auto portability is powered by paired “locate” and “match” algorithms, which are designed to track down and identify participants with more than one 401(k) savings account in the retirement system and begin implementing a roll-in.

Crucially, auto portability’s algorithms undertake this process automatically (while giving participants the chance to opt out if they choose), without plan sponsors having to spend money on engaging participants. The Employee Benefit Research Institute estimates that 14.8 million participants change jobs every year, and according to the largest plan record-keepers, nearly one-third (31%) of these participants will prematurely cash out their 401(k) savings balances within a year of going to another employer.

It’s one of the most destructive decisions that retirement-savers can make.

According to our research, a 30-year-old who cashes out a 401(k) account with $5,000 today would forfeit up to $52,000 in earnings they would have received by age 65, if we assume the account would have grown by 7% per year.

Alternatively, stranding 401(k) savings accounts in former-employer plans, while not a good strategy, at least allows the savings remain invested in the U.S. retirement system.

We have found that if the same hypothetical 30-year-old left $5,000 in 401(k) savings behind in their former-employer plan today, they would be stuck with $2,052 in fees on their account balance by age 65 – and on a compounded basis, translating to $8,488 in total lost savings over that 35-year period.

The good news is that, at last, sponsors can actually measure the success of their financial wellness initiatives and obtain peace of mind that their programs are indeed raising retirement prospects for their plan participants.

 

This article was written by Spencer Williams from Employee Benefit Adviser and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

The views of the author of this article do not necessarily represent the views of Gradifi. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.