PLANSPONSOR - February - March 2022 - 37

PARTICIPANTS SPECIAL ISSUE | PLAN DESIGN
savings by tweaking the match must
remain sensitive to setting the threshold
so high that they price these workers out.
The 2004 research report " How
Much Should the Poor Save for
Retirement? Data and Simulations on
Retirement Income Adequacy Among
Low-Earning Households " from the
American Enterprise Institute questions
plan sponsors promoting retirement
saving to low-income workers.
In the report, AEI researcher Andrew
G. Biggs wrote, " ... hasty efforts to expand
retirement savings among low-income
households may be counterproductive.
Given that it does not appear that
low-earners need to save substantially more
in order to maintain their pre-retirement
standard of living once they cease working,
promoting such savings through either
a hard or soft mandate might cause
unnecessary hardship to working-age
households. "
Warren Cormier, executive director
of DCIIA's Retirement Research Center,
in Boxford, Massachusetts, says offering
a financial wellness program combined
with an emergency savings program
underscores the importance of having
sufficient savings to cover emergencies and
is the most powerful tool available for lowand
moderate-income participants-i.e.,
those with households earning roughly
between $20,000 and $75,000.
" The first thing they need to do before
they can really focus on long-term saving or
retirement is to make sure they get a sense
of feeling in control, and of security about
their day-to-day experience, " Cormier says.
" Then you can move to a higher order of
experience-that is, saving for what might
happen 20, 30, 40 years from now. "
Findings from the Life Insurance
Marketing and Research Association show
that almost 30% of workers have no emergency
savings fund, which can lead them
to not save, or to withdraw money from
their retirement accounts.
Plan sponsors can turn to their retirement
plan adviser for help with plan design
" ... hasty efforts to expand retirement
savings among low-income households
may be counterproductive. "
and benefit strategies. The adviser can start
a financial wellness campaign, using plain
language to help employees understand
the information and resources available
to them, says Greg Adams, a consultant at
Fiducient Advisors in Chicago.
For the sponsor, " providing information
about the auto-features, the statistics
behind why those work, how they work-
that information really helps the sponsor
start to make decisions and helps alleviate
some of its concerns that it's being too
controlling or too paternalistic, " he adds.
Tailored Social Security
Education and Guidance
Social Security is more crucial to lowincome
earners' retirement than to higherincome
workers' because the benefit is
expected to replace a greater share of the
formers' lifetime earnings, Johnson says.
" It's not that their benefits are
higher than [benefits are] for higherincome
workers, " he says. " It's that Social
Security will replace a larger share of lifetime
earnings for lower-income people.
Because higher-income people tend to
invest more in retirement plans outside
of Social Security, they have other sources
of income from investments, and those
other sources are more important, while
Social Security is a smaller share of their
total income at older ages. "
For context, the U.S. Congressional
Budget Office's July 2021 calculations
of Social Security replacement rates for
Consumer Price Indexed pre-retirement
earnings were: 78% for the lowest-earning
fifth of retirees, 49% for the middle fifth
and 31% for highest fifth.
Changes the Social Security Administration
has made-to gradually push
the age for collecting full Social Security
benefits from 65 to 67-could reduce
the benefit's importance for all workers,
Johnson says. " Going forward, though, it's
not clear that Social Security will be more
important than it is today, and, in fact,
there's some indication that it might be less
important for workers at all levels. "
Workers who retire at 62 will be paid
at 70% of their full Social Security benefit,
whereas " it used to be that if you retired at
62 you would get 80% of your full benefit, "
Johnson says.
Retirement plan sponsors and advisers
have many options when deciding how to
communicate about Social Security's role
in retirement readiness to low-income
participants, but they will also encounter
challenges, sources say.
Low-income participants could
benefit from education that places more
emphasis on understanding how Social
Security works and where the benefit
comes from, says Chuck Williams,
CEO at Finspire, a retirement planning
consultant headquartered in Chicago.
Information that employers provide to
low-income retirement plan participants
on how to maximize the benefit needs
improvement, he says.
" People sometimes know what [their
benefit] is, but those are really estimates
and can be very far off on what the actual
case is, " Williams says. " [They need] a
more specific formula and guidance on
not just where the estimate comes from
but how to maximize it.
" One of the bigger mistakes people
make is starting Social Security early, "
Williams says. Participants need assistance
in order to make the optimal choice
for when to begin claiming benefits;
education should highlight the advantages
of delaying, he observes.
Most existing education is general
advice and is not tailored to low-income
participants' needs, he says. -Noah Zuss
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