While having good benefits like a high percentage 401(k) match is a great way to attract and retain employees, there’s one major and often-unmentioned caveat: in order to take advantage of such perks, employees must first be financially secure enough to be able to afford saving for retirement.
It’s not just hiring, culture, or pay; best-practice DEI (diversity, equity, and inclusion) efforts should extend further, even into benefits. While it’s widely known and acknowledged that women, people of color, disabled employees, and individuals belonging to other marginalized groups are paid less and overlooked more often than, say, their white, male, and/or able-bodied counterparts, it’s important that organizational DEI efforts don’t just start and end at diverse hiring practices, standardizing pay rates, and click-through sensitivity training. When it comes to things like retirement savings and investments, those are the work-related financial details that can either contribute to widening or shrinking the wealth gap for employees in a very personal and tangible way.
As PlanSponsor notes, the National Compensation Survey from March 2021 from the Bureau of Labor Statistics found that “the percentage of individuals with the lowest average hourly wage who have access to a defined contribution (DC) retirement plan is fewer than half that of individuals with the highest average hourly wage.” However, even more concerning is that the disparity between the “haves” and “have nots” widens even further when you take a closer look: 73% of those high-earners will participate in their plans while only 22% of those earning the lowest average hourly wage will.
“You have to have money to make money”
While having good benefits like a high percentage 401(k) match is a great way to attract and retain employees, there’s one major and often-unmentioned caveat: in order to take advantage of such perks, employees must first be financially secure enough to be able to afford saving for retirement. After all, employer matching only matters to people who have enough wiggle room to invest in their future; for those who have difficulty meeting their immediate needs and are living paycheck to paycheck, they don’t have the luxury of squirreling away funds for later, so these benefits don’t affect them and may as well not exist. Investment can be a daunting task for someone who doesn’t understand how the stock market works, and seemingly impossible for those working multiple jobs just to make ends meet. And healthcare? Well if it’s $100 every month even when you’re healthy, it can make more sense for some employees to take their chances because they can’t afford to lose that money.
Now, these caveats may not apply to employees at every organization. The best way to find out is to evaluate your individual company’s position by performing a survey and analyzing your enrollment statistics. Who is enrolling? Are there demographic trends by age, gender, race, or pay rate? Is it only employees in high-paying jobs? What about the lowest paid workers? What percentage of workers enroll in healthcare plans? What plans are more popular? With this information, sponsors can find trends they may not have otherwise seen, and from there figure out the DEI problem areas that need addressing.
Addressing benefits-related inequality can be as multifaceted as the reasons causing it, and the approaches sponsors can take vary widely by their situational need, organizational size, and financial ability. One possible solution is simply paying their low- and middle-earning employees more. Though there are currently serious concerns about inflation and the rising cost of living, even without the current trend toward higher wages the cost of living has continued to rise as wages stagnated for years. This also squares with studies that show that the best way to lift people out of poverty (and stimulate local economies!) is to simply give them money. Additional options could be to allow employees take unused vacation days as money toward loans, offering budgeting and financial literacy classes, or making budgeting apps or spending trackers free to access for employees. Sponsors could also focus on helping employees build emergency funds, which are frankly more relevant to low-income individuals.
On the other hand, there are many legal and logistical caveats to consider as well. First and foremost, discrimination law. Designed to ensure employees can’t be maligned or mistreated because of protected class status, the way discrimination law works means that sponsors can’t offer increased benefits to certain demographics even if done in good faith in an attempt to counterbalance systemic inequalities (ex: women getting a higher 401(k) percent match than men, employees of color getting paid more than their white colleagues, etc.). When it comes to turning intangible benefits like vacation time into tangible monetary funds, that can also become taxable income, which may ultimately not be desirable for some employees! Even emergency funds can be tricky; for example, sponsors have to first determine how much money “counts” as an emergency fund. Is it one thousand dollars? 3-6 months’ worth of living expenses such as monthly mortgage payments or rent, utilities, loan payments, and groceries? Should these funds be kept liquid, per the traditional emergency savings advice, or invested? Should there be a company matching program (what percent?), and to whom should it be extended—everyone, or just low- and middle-income workers? How are these groups defined? Though this seemingly simple approach is deceptively complex, it’s a worthwhile thought exercise that can lead to concrete results and make a significant difference to applicable employees and their financial wellbeing.
No one said these efforts would be easy; after all, these are complex, systemic issues that every individual and organization must grapple with. However, with thoughtful consideration, good-faith efforts, and by listening and responding to employees’ needs, plan sponsors can find the best path for them and their employees to ensure that everyone has the opportunity to live a comfortable and financially secure life while also making the world a more just and equitable place.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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