With current levels of inflation and market volatility, young American workers saving for retirement face an uncertain future. Gen Z aims to rewrite their retirement future by saving more, according to recent reports. But a majority lack proper financial knowledge on how their savings can reach retirement goals and may be easily derailed by faulty advice from social media.
Without mandatory contribution levels, Gen Z workers’ overconfidence in their savings may lead those with disposable income to squander their wages. At the same time, those living paycheck to paycheck will save less for retirement as other big-ticket goals and necessities come their way.
Some argue that as employers, companies should continue encouraging and educating their workers about retirement contributions.
Others feel employers should mandate retirement contributions by automatically deducting retirement contributions from workers’ wages as a benefit and a social responsibility to their workers.
Mandated Contributions Help Save for Retirement
Although those living paycheck to paycheck argue that they cannot afford to save for retirement now, that sentiment and way of life are precisely why mandated retirement contributions are necessary. Without saving something, they will either never be able to retire or be forced to rely on the support of others to retire.
Inadequate retirement savings leads to overdependence on government welfare, having to ask friends or family for money, or risk going into debt at a time when medical bills rack up. That's not even considering cost of living increases, even while the standard of living may decrease.
According to James Royal of Bankrate, 55% of workers have yet to calculate how much money they will need to save by the time they retire. Realistically, most Gen Z workers cannot afford the 15-20% suggested retirement contributions needed to retire comfortably, according to NASDAQ forecasts. They are either not well-educated on the cost of retirement or simply cannot afford to have 15-20% of their income go toward retirement.
On the other side of the coin, companies are incentivized to take action by automatically deducting and saving money for employees, not only for the workers’ benefit but also for the company’s future savings. For much of the workforce, relying solely on traditional pension plans is not enough to sustain their lifestyle in retirement, necessitating a turn to government welfare.
This reliance on government welfare programs like Social Security is as much a business issue as it is a social issue. Funding for welfare is commonly raised by increasing both personal and corporate taxes. This ultimately serves as an additional financial burden for companies.
Recent studies by the Transamerica Center for Retirement Studies show that around 60% of U.S. employees expect their main source of retirement income to come from welfare programs such as Social Security. In addition, 30% of workers are not confident about their financial preparation for retirement, with an additional 42% reporting only feeling somewhat confident about financial preparations made for retirement.
Many believe companies have a responsibility to provide employees with other means to prepare and feel more confident in their retirement, and one key way is through mandated automatic contributions.
But critics of mandatory contributions point to low job security, a tenuous job market, and sky-high inflation as evidence that workers do not have the power or opportunity to seek new employment. Those workers are already stretching their dollars to pay for their day-to-day life, especially as big ticket items come up.
Employers can aid by mandating a certain baseline contribution, such as a 2.5% retirement contribution alongside a 2.5% employer match. That offers a baseline to operate off on as a part of a benefits package, alongside meaningful education and further incentivization for retirement savings goals.
In this way, employers can put their workers on the right track for retirement without leaving them behind or putting undue strain on their monthly take-home pay.
Combat Misleading Advice Automatically
People can easily be distracted from their financial goals in the face of expensive goals. Gen Z may also be susceptible to misinformation by social media influencers and place their hard-earned money in uncertain schemes, and find themselves investing in scams, based on inaccurate information.
More than a third of Gen Z gets financial information from TikTok, and another third reports receiving financial advice from YouTube (Csiszar). This compares to less than a quarter of Gen Zers who work with a professional financial advisor or broker (Broaddus). While some social media content provides helpful and factual information in brief bursts, some channels and influencers may provide “get rich quick” suggestions that skim over details, misleading or underselling the work required for certain financial decisions.
Although the majority of Gen Z have the knowledge of the necessity to save for retirement and have been galvanized to take action through “finfluencers,” their enthusiasm belies a lack of knowledge of personal finance and overconfidence in savings.
While Gen Z should still have the freedom to follow the investment advice of whomever they want, the consequences may be losing one’s retirement savings due to poor financial decisions, based on faulty advice.
Notably, 4 in 10 workers don’t know where to turn for retirement advice and 35% turn to family and friends. Another 35% do their own research online. Bith approaches, while helpful if done properly, can lead to improper advice and misleading information for investments (EBRI). Companies mandating retirement contributions also require workers to have conversations with professional financial advisors.
Saving for retirement is often not the largest priority for much of Gen Z. As the graph below, taken from a 2022 Blackrock study, illustrates, 72% of Gen Z is willing to save less for retirement, if faced with other high end goals, like buying a house or starting a family. The study shows millennials and Gen X find the prospect of retirement much more looming than a generation who is just starting off their career.
With student loans, the cost of housing, buying a home, starting a business, or even just supporting a family, there is a lot that the average young American has to consider and a lot of voices demanding attention from a worker’s paycheck. When given the choice, most would choose a larger paycheck and then personally allocate their money, often with only a small portion left at the end for retirement savings.
Automatic contributions forced by mandated contributions allow companies to help Americans save money for a retirement account without thinking about it. As soon as money is out of sight, it’ll become out of mind. According to Richard Thaler, the 2018 economics Nobel Prize winner, the reason for the program’s success lies in behavioral economics: if workers do not have to think about it and it is automatically being done, they will unconsciously be saving more and more.
For those who oppose mandates, the argument is that automatically enrolling in retirement contributions gives workers a false sense of security in their retirement. This is especially true if not all employers create programs at the projected 15-20% required for retirement.
Proponents of this view would argue that employers should educate their employees, provide resources and incentivize employees to make plans for retirement. While this argument raises a valid concern, it overlooks that these tactics stick to the current status quo. But that status is changing. The overall share of workers across all ages who think they are on track with their retirement savings fell to 63% in 2022 from 68% in 2021.
Most employers do offer access to 401(k) plans, have courses on financial planning and education in their HR departments, and some even have matching programs to incentivize contributions. But only 58% of retirement plan sponsors have confidence in their employees’ retirement plans compared to 63% last year, a 5% decrease.
The data indicates that both workers and employers are losing confidence in their ability to plan for retirement.
Many employees fail to take action on these programs; less than a fourth of them began saving because of employee matching. Being automatically enrolled in a mandated program incentivizes workers to identify where their money is going and gives them greater confidence in their retirement savings as the amount they have saved increases.
Companies that use mandated contributions to retirement savings must invest in resources to combat a false sense of security. This is where education and incentivization come in. Mandated contributions can also have annually increased minimums.
Is Gen Z Responsibly Saving
The most vocal opponents to corporate retirement mandates argue that employers cannot and should not regulate how employees spend their paychecks, no matter how well-intentioned the mandate may be.
Proponents of this idea insist that while forced retirement contributions can be beneficial for those who are squandering a large disposable income, that is not the case for most Americans, especially not the ones who will need retirement savings the most. Gen Zers are on the right track, though, and having seen previous generations struggle through both the Great Recession and the COVID-19 pandemic, the oldest members of the Gen Z generation are saving nearly 14% of their income for retirement, a higher share than other generations’ 12%.
Admittedly, while the average Gen Z’s saving of 14% is impressive, the argument that workers’ savings cover retirement is an incomplete truth, as merely saving for retirement is not the same as having a retirement plan.
This has dangerous implications, as 36% of Gen Z think they need less than $250,000 for retirement, far below other generations and the conventional $1 million retirement mark. And even that dollar amount is steadily increasing due to inflation and market volatility.
If companies mandate retirement contributions for all of their employees, they need to also educate those employees about retirement. Lessons in the time value of money, and investment knowledge in 401(k)/brokerage accounts can be delivered by certified financial planners and investment experts, coming alongside to explain to employees where their money is going and the benefits of saving for retirement.
As shown in the graph above, while 62% of Gen Z workers have retirement savings, only 30% feel confident that their retirement savings are on track. This may be due to many who make enough to save but may squander their disposable income, spending more as their paychecks go up without consideration of the seemingly distant idea of retirement.
Another potential reason for this 30% disparity between savings and confidence in savings could be because they do not have a plan or place to save their money, even though most know, objectively, that it is good to save for the future. With mandated employee contributions, employers can set workers on the right track.
What Next
Mandating contributions or even simply automatically mandating enrollment for the first five years of employment could go a long way toward helping workers prepare for the future. Companies can go further by requiring all plans to start with an initial contribution of 2% and then increase the number of automatic contributions through auto-escalation.
Under current trajectories, Alicia Munnell, director of the Center for Retirement Research at Boston College, explains, “half of American households today are not going to have enough to maintain their standard of living in retirement, and that is the bottom line. This is an inadequate system we have.”
Automatically enrolling and educating workers on contributing to their retirement plans may be the solution to help young Americans save more for the future—but only if it is required by the employer.
This post was produced and syndicated by Wealth of Geeks.
source https://wealthofgeeks.com/mandated-retirement-contributions/
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