In the 1980s, Defined Contribution (DC) retirement plans were viewed primarily as a supplement to defined benefit pension plans, which were popular. Today, DC plans continue to evolve as many companies rapidly shift towards implementing financial wellness programs for their employees.
According to a report by Mercer, 62% of employers consider financial well-being a “strong focus” for the organization. This belief is even stronger for participants under 30, as 7 in 10 believe their employers have an obligation to help employees with financial wellness.
DC plans have played a significant role in bridging the gap between employees and their financial wellness. This blog will explore the impact, benefits, and strategies for building a successful financial wellness strategy.
The Intersection of Financial Wellness and Defined Contribution Plans
The concept of financial wellness has been a hot topic for years. While still vague, the Consumer Financial Protection Bureau defines it as a variety of financial concepts that help participants stay financially fit and enable them to act intelligently regarding their own financial matters.
Though popular, the importance of financial wellness today cannot be ignored, and companies are offering plenty of workplace financial wellness benefits to help improve the overall well-being of their employees. This intersects with defined contribution retirement plans on a major scale, as an NASPP survey by Morgan Stanley revealed that 89% of employers considered 401(k) and other DC plans a core “financial wellness” benefit.
Moreover, financial wellness doesn’t just benefit one party. If an employee is going through financial stress, it can also hurt their employer’s bottom line as well. Hence, through defined contribution plans, business leaders are focused on making a positive impact on their employees’ personal lives as well as their business performance.
Benefits of Financial Wellness in Defined Contribution Plans
In the wake of The Great Depression, employers added benefits packages to attract the best talent and support their employees’ needs and goals. This trend is still observed today and will continue in the coming years. Including a financial wellness program has now become an essential aspect of employee benefits as they offer several advantages for both employees and employers such as:
- Improved employee productivity: Budget counseling, debt reduction programs, and student loan support can reduce employees’ personal financial hardships, allowing them to save time from debt concerns and shift their focus towards work.
- Increased employee satisfaction: Employees have shown increased satisfaction when given access to financial wellness programs such as DC plans. Employees prepared for unexpected financial emergencies are more engaged at work because they do not have to worry about their long-term finances and can set and achieve individual goals.
- Greater employee retention: Employees are critical assets that drive business growth. DC plans help employers offer employee perks to help them stabilize their money. Employees are more likely to stay in the organization if they know the company has their back in helping them with their finances, thus increasing retention and improving company culture.
- Strong employee recruitment: Competition and job-hopping are common trends in today’s job market, and to reduce this, employers have to provide financial wellness benefits to retain their best talent. These benefits also provide a good sense of stability in the eyes of newcomers looking to join the company. Providing financial support through DC plans can boost recruitment and allow new and current employees to feel valued in the organization.
- Reduced absenteeism: With rising inflation rates and cost of living, some employees are forced to take secondary jobs to make ends meet. This can lead to increased absenteeism in their main job, which is a problem for both them and the company. Hence, financial wellness benefits play a significant role in altering that situation
Strategies for Integrating Financial Wellness Into Defined Contribution Plans
Plan sponsors have several opportunities here to boost the financial wellness of employees through DC plans, and some of them include:
- Student Loan Management Platform: Using a 401(k) plan as an example, employees can get a clear picture of that and their student loans in one place. They can also get advice on prioritizing and managing their student loan payments. As per the SECURE 2.0 Act, employers can also choose the 401(k) match for student loan repayments, a feature that allows them to treat employee student loan debt repayments as if they were 401(k) contributions.
- 529 Education Savings: Including this in the employee’s benefits package allows them to tackle rising education costs. It’s easy to manage as it seamlessly integrates into their existing benefits package.
- Providing financial coaching: Regular educational workshops and tailored 1:1 guidance can help employees make informed decisions about their savings and investment strategies within DC plans.
- Foster sustainability and social responsibility: Integrating ESG factors into existing DC plans will not only reap long-term returns but also address the growing concern about responsible investing.
- Promoting features for varied needs: Features like automatic enrollment, diversified investment options, and catch-up contributions for older employees can cater to diverse financial needs and boost participant engagement.
Financial wellness is becoming an integral part of Defined contribution plans, and by providing the right tools, education and support, employers can help employees achieve financial security, maximum productivity, and retirement readiness. Employers must adapt to comprehensive strategies to allow employees to reap the benefits.
