Employers can influence your retirement prospects

Published Aug 15, 2015

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Employers are well positioned to nudge you, as an employee, to make the right decisions about your retirement at critical points in your working life, Viresh Maharaj, the chief marketing actuary at Sanlam Employee Benefits, told the recent Institute of Retirement Funds Africa conference.

Employers decide on the structure of the retirement fund to which you contribute, and company infrastructure puts them in a powerful position to give you information you can understand that will influence your retirement funding decisions, Maharaj says.

“In the Sanlam Employee Benchmark Survey, we found that employees view employers as a source of truth when it comes to retirement-funding challenges and we call on employers to play a more engaged role in enabling better retirement outcomes for their employees,” he says.

Another critical point at which an employer can engage with you about your retirement funding is when you leave its employ, he says.

It is well known that most employees who resign do not preserve their savings, but withdraw them as a lump sum to use for a variety of purposes.

The Benchmark Survey found that more than half of the employees who withdrew their retirement savings were not told how cashing in their savings would affect their financial position, and did not understand the tax implications of their decision.

These individuals regretted their decisions and indicated that, with the right information, they would have acted differently.

Maharaj says that employers should change their communications to employees when they resign so that employees can better understand the negative impact of withdrawing their savings on their ability to create lifetime wealth.

There is anecdotal evidence that human resources departments find it easier to process a withdrawal than to process a member’s request to preserve, he says.

“They typically advise employees to withdraw their savings. That is criminal,” Maharaj says.

He suggests that employers explain the tax consequences of taking your retirement savings in cash on resignation. For example, you should be told that, if you withdraw R1 million from your retirement fund, you will pay R207 000 in tax.

If you are 45 years old, you would not only reduce your savings by R1 million and the growth on that, but the R207 000 you pay in tax, at growth of 10 percent a year, would amount to R1.4 million by the time you retire at age 65.

If your employer or fund asks you if you are willing to forfeit R1.4 million of your lifetime wealth, it may influence you to make the right decision, Maharaj says.

A typical annual benefit statement from a retirement fund is not helpful for most employees, he says. Funds should design benefit statements so that they simply show whether or not you are on track for a comfortable retirement.

He suggests using a visual cue, such as a traffic light, to indicate the status of your benefits, where red means your retirement savings are inadequate and you are in trouble, amber means your savings are dodgy, and green means you are doing quite well and should keep doing what you are doing. Anyone could understand this type of statement quickly, and the visual cues could have a far greater impact on behaviour than the reams of information that some funds provide, Maharaj says.

When you receive your annual benefit statement, your employer should provide you with the information you need to make better retirement-funding decisions and you should also be afforded the opportunity to increase your contributions if you need to boost your savings, he says.

Maharaj says that human resources departments play a vital role in retirement-funding, but their interests are not aligned with the objectives of saving for retirement. For example, your human resources department can influence the decisions you make about your retirement-funding on your first day of work, but typically human resources staff are focused on their administrative responsibilities and not on enabling new employees to make better retirement decisions.

The Sanlam Benchmark Survey highlights that one in three employees regard their human resources department as their only port of call for retirement-funding matters. As a result, Maharaj says, they are probably making decisions about how much to contribute to their fund, and the underlying investments in which to invest, without proper advice.

Compounding the problem, according to the Sanlam Benchmark Survey, is the fact that seven out of 10 members don’t change the first decision they made about their retirement funding, despite the need for the adequacy of retirement provisions to be reviewed and reassessed throughout your working life.

Maharaj says employees’ progress in providing for their retirement – measured by their average net replacement ratio – should be one of the key performance indicators of human resources professionals, because “what gets measured gets done”.

A company’s sustainability reports and measures for broad-based black economic empowerment should include measures to improve the financial well-being of employees, he says.

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