The Sanlam Benchmark Survey Research Report says that, among the 500 retirement fund members interviewed, two-thirds turn to a human resources officer when they need advice about their retirement savings.
Only 14 percent of the members interviewed said they contact a financial adviser or broker for advice.
Furthermore, almost half the fund members indicated that when they are about to retire, they will seek advice about their financial options from a human resources officer.
On a positive note, the survey found that half of the funds canvassed have a formal strategy for rendering financial advice to members, but the survey does not indicate whether that advice is rendered only at retirement or throughout the members’ working lives.
And it means that the members of the other half of the funds surveyed are relying on human resources officers, colleagues, family, friends or themselves for financial guidance.
The survey research report notes that “the industry, retirement fund trustees, administrators, product providers and advice professionals are faced with the challenge to help change the retirement landscape from an administrative human resources process to an informed decision-making process”.
It says the decisions that people make while they are employed will ultimately affect how comfortably they are able to live in retirement, and, unfortunately, most fund members start to consider their retirement finances only when they are close to retiring. It is difficult to make up for contributing too little once you are close to retirement.
The survey’s findings highlight a huge gap in the process of ensuring that members choose an appropriate retirement fund option, decide how much they need to contribute and then stick to a financial plan that will get them to a comfortable retirement.
It is a gap that National Treasury is seeking to address, to some extent, by requiring that funds provide default investment options and a default pension. Draft regulations on establishing these options are expected soon.
The gap is also being addressed by retirement funds that regularly inform their members what percentage of their income their retirement savings are likely to replace – their replacement ratio. According to the survey, 47 percent of funds send out such communication regularly.
But regular communication of this nature will not solve all the problems; many members may still need advice about the best way to rectify a replacement ratio that is too low.
And some members may have to be coached on how to save more. They may also have to be told whether their replacement ratio is based on their total remuneration or on only a percentage of it. These tasks are best performed by a financial planner.
The large proportion of members that the Sanlam Benchmark Survey indicates are tapping their human resources officers for advice raises the question of the role of employers in providing professional advice. This may be an additional cost, but its benefits can extend beyond keeping employees on track for retirement to ensuring that they make the most of what they earn.
Anne Cabot-Alletzhauser, the head of Alexander Forbes’s Research Institute, asks in a recent blog, “Should employers care about employee finances?”.
She quotes from a United States study that says “employees with money problems are like sharks swimming around the workplace taking bites out of the bottom line”.
The study, titled “Education to promote employee financial wellbeing: what role for employers?”, was conducted in 2008 by Aimee Prawitz and E Thomas Garman, of the Personal Finance Employee Education Foundation at the University of Illinois and Virginia Tech respectively.
Cabot-Alletzhauser says the study goes beyond stating the usual litany of issues that unhealthy finances throw up for employers, such as lack of concentration and productivity at work, absenteeism to resolve personal issues, lack of commitment, less pay satisfaction, more sick leave, and more actual health-related problems.
The study highlights that not only are all businesses vulnerable, but also that financial distress cuts across all income and demographic groups.
Cabot-Alletzhauser says the study also challenges the notion that it’s up to the employer to “fix this problem” simply by increasing employees’ pay. It argues that pay becomes adequate only if employees can learn to live within their means and adequately cushion themselves against life’s shocks.
She goes on to quote from Scarcity, by Sendhil Mullainathan and Eldar Shafir, published last year. She says the book makes the point that scarcity, including financial scarcity – or the overwhelming stress that it triggers – “directly reduces bandwidth: not a person’s inherent capacity [for problem-solving or logical reasoning] but how much capacity is currently available for use”.
Mullainathan and Shafir write: “Scarcity doesn’t just lead us to borrow or fail to invest. It leaves us handicapped in other aspects of our lives. We must get by with less mind available – making life that much harder.”
This has potential implications for an employer who relies on staff to make good decisions, solve problems and fight fires, Cabot-Alletzhauser says.
She says there is no greater financial shock that cuts across all employees than the ceasing of income at retirement. And yet, with more than 80 percent of retirement funds shifting from defined-benefit to defined-contribution funds, employers have effectively divorced themselves from monitoring their employees’ journey to self-sufficiency.
The Financial Planning Institute has recognised the need for employers to play a role in ensuring that employees who are not the typical target market of independent financial planners receive basic financial advice. It is planning to lobby Treasury to award a tax break to employers who pay the fees of independent financial planners who advise their employees.
This is an exciting proposal that all employers should embrace.