Trends in Retirement Plans

Purposes of Retirement Plans

Before delving into specific retirement plans, it's useful to examine why employers and employees want or need these plans.

For the employer

Retirement plans are expensive and complex.

Given the legal requirements that need to be met, the gains must be considerable for an employer to offer a retirement plan.

Why do employers offer retirement plans? There are several reasons…

Responsibility. Part of the answer may lie in the previous section on Social Security. If the projections are correct, then there may be a lowered safety net for younger workers in the United States. The employer is usually called upon to fill in gaps like these in the social safety net.

This may occur due to thoughts that organizations have a social responsibility to provide benefits (like retirement plans) to employees. Some of this may seem like paternalism, but it's true that the employer can provide more muscle in the marketplace. Employers can provide these services at a lower cost than the employee could obtain them on their own.

Business expense. Retirement plan costs can be a business expense if the plan is properly devised.

Relationships. In the end, it's the employer's relationship with the employees that drives the decision to have a retirement plan. There are 2 elements to this:

• Competition. Employers need to pay competitive salaries to attract and retain employees. They also need to provide benefits that other employers offer in order to be competitive. Retirement plans are a common form of benefit offered by organizations.
• Retention. Retirement plans can also be structured to provide a form of golden handcuff. An employee can find it advantageous to stay with the employer because they will receive a good retirement by staying with the organization.

For the employee

Secure 2.0 mandates that organizations with 401(k) retirement plans automatically enroll eligible employees at a minimum level unless they opt out. This has led to younger generations saving for retirement much earlier than older generations did, although many Americans still don’t begin saving until their 30s or later because other expenses take precedence.

The desire for retirement income quite naturally rises with age. The closer an employee gets to retirement, the more important the topic becomes. However, the earlier they begin saving the better off they will be at retirement due to the power of compound investment returns.