Key employees in small- and medium-sized businesses want to feel good about their plans for retirement — and they’re doing something about it. The survey of these highly compensated employees (HCEs) reveals that while these employees identify some threats to their retirement security, they also have a willingness to take charge of their own financial situation. In the survey, key employees identified the top three threats to their retirement as market volatility (51%), reduction in Social Security benefits (47%) and reduction in Medicare benefits (45%). In response to how market volatility affected their financial well-being, almost half indicated they have moved to a more conservative investment approach. And, they are using a variety of ways to save for retirement, including Individual Retirement Accounts, savings accounts, brokerage accounts and real estate.
When asked to select the main issues key employees are most concerned about when it comes to retirement, the top answers included: 1) being able to enjoy the same quality of life in retirement, 2) outliving personal savings and 3) rising cost of inflation reducing purchasing power. Nonetheless, they don’t appear to be passively accepting these challenges as the status quo. Eighty two percent of key employees are aware of the amount of money they will need in order to be comfortable in retirement; and, 62% of them believe they are saving enough money in order to live comfortably in retirement.
Financial goals are not out of reach
The research also stated that key employees are much more satisfied with their current situation and progress towards future financial goals than other employees. The report showed a significantly higher percentage of key employees (62%) agree they are extremely happy about their current financial well-being compared to all other employees (27%). More than half of them rate themselves as financially healthy (66%), compared to other employees (43%). And, key employees are more likely to completely agree that they are taking steps to improve their financial health (37%).
So … what does this mean for you and your business? That’s where the connection with a second research study comes in; a study offering a way for employers to leverage key employees’ retirement attitudes with benefits that can support broader organizational goals.
A solution
A couple months ago I reviewed some trends in tax planning from the new tax law. I suggested then that, especially in the current tax environment when income taxes are on the rise, nonqualified deferred compensation plans (NQDC) are particularly compelling. Such plans allow for an employee to defer compensation, and therefore income taxes, into the future. Likewise, it allows employers to use discretionary contributions as an incentive and so-called “golden handcuff.” The second research I referenced appears to support this point of view. It suggests employers truly care about their key employees’ ability to retire. Nearly three in five employers expressed some level of concern about their organization’s top talent having sufficient income during retirement.
Why deferred compensation as a solution? The paper reveals the employers’ top three reasons to offer a NQDC plan are to (they could choose multiple reasons):
In addition to sponsoring NQDC plans where the employee is deferring income, employers have also made increasing use of discretionary contributions. Over six in 10 plan sponsors reported using discretionary contributions in 2012, and this trend has increased steadily since the Great Recession began. This may not only be because of increased employer cash availability, but also because these plans are an alternative to nonqualified stock options and restricted stock grants.
This research demonstrates a classic alignment of needs between key employees and their employers. The top talent wants a way to save more for retirement, and the employer wants to attract, retain and reward these employees. A supplemental retirement plan, such as nonqualified deferred compensation plan, may well fit the bill.
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