Retirement Plans Use Too Much Jargon, Say Employees

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City governments, in their roles as employers, are striving to attract talent that can support the critical work of serving communities. However, the wages of state and local government employees tend to be lower than for private sector employees with similar backgrounds. So, how can municipal employers provide a more competitive alternative?

One way is by offering employer-sponsored retirement benefits.

According to numerous surveys, including the Society for Human Resource Management’s 2018 Employee Benefits Survey, government employees value these types of benefits highly. But many employees remain confused about what their plans offer and, “wish for clearer language to help them better understand their plan’s design, investment menu and post-retirement options,” according to a new white paper published by Invesco, an independent investment management company.

The paper reveals that participants tend to get confused over jargon specifically tied to defined contribution (DC) plans. According to the paper, advisers and plan sponsors should:

  • Use clear language in their communications to plan participants (e.g., tell them they are leaving “free money” on the table as opposed to using phrases like “projected retirement income shortfalls” or “uninsured longevity risk”)
  • Succinctly emphasize the benefit of an employer match to plan participants (e.g., tell them “the match is free money” as opposed to “the match allows me to invest more in my 401(k)”)
  • Describe a target-date fund as one investment option for plan participants that is “managed for you” and helps “achieve your goals”

Adding to the confusion is the fact that most stateshave reformed their retirement plans since the Great Recession. There are many nuances within these different plans and ensuring employees understand the value of their benefits packages is just as important as controlling costs.

Retirement and savings coverage, usually provided by a defined benefit (DB) plan, has been an important characteristic of public sector employment. A traditional DB plan is a retirement plan sponsored by an employer, where employee benefits are computed using a formula based on years of service and salary history.

But while employers have traditionally offered DB plans to their employees, the high costs associated with these plans have caused some employers to switch to alternate retirement plan options. In fact, 17 percent of local government workers stopped receiving contributions from their employers to their DB retirement plans in 2017, up from 12 percent in 2012.

In response to these rising costs, employers have begun introducing employees to a new DC plan alternative. A DC plan places the investment risk and reward completely on the employee and is typically a tax-deferred retirement plan, like a 401(k), in which a certain amount or percent of money is set aside by the employee and/or employer.

Under a DC plan, the future retirement benefit is based upon how much the participant, and employer where applicable, contributes, and the earnings made on those contributions. In 2017, approximately 33 percent of local government workers had access to DC plans, while only 15 percent participated.

Most public servants do not know how much they need to save for a comfortable retirement. In fact, a 2017 survey by the Center for State and Local Government Excellence (SLGE) and the TIAA Institute found that, startlingly, only 19 percent are very confident that they are saving and investing appropriately for retirement; 51 percent are somewhat confident.

As more younger workers enter the workforce, it is increasingly important for local government employers to ensure their benefit offerings are well understood and to provide education and guidance to help their employees get on the path to more secure financial futures.

 

Anita-Yadavalli-small-2About the Author: Anita Yadavalli is the Program Director of City Fiscal Policy at NLC. Anita leads NLC’s Public Sector Retirement initiative, with a focus on research and education for city leaders on retiree healthcare benefits, as well as research and programming on other city fiscal policy issues.