A “retirement first” approach to employee benefits

The sequence in which to introduce employee benefits is one of the most important questions for HR leaders to consider in a growing organization. Here’s a common question we often hear as part of these conversations: “Aren’t retirement benefits something I should add later, once we have health benefits and other employee perks in place?”

Not necessarily. There is often a strong business case for putting retirement benefits in early as part of a total compensation package. If more employers internalized this case, we would see more small and medium-sized employers adopting retirement programs, which would be good for the economy, good for business, and good for employees’ financial health.

Here are some of the main reasons why you should consider adding retirement benefits earlier than you might think.

Retirement might be the most valuable benefit

If you have a limited compensation envelope, you’ll want to spend it in the way that brings the biggest value in driving recruitment and retention. We’ve conducted extensive research on the value of a good workplace retirement plan, and have found that it can be worth nearly a million dollars over the course of a lifetime for a typical Canadian. Why is this value so high? Retirement is one of life’s biggest costs, and if you can find more efficient and effective ways to save, you can make that cost much more affordable. Workplace plans, if they are designed right, also tend to be much more efficient than what individuals would likely do on their own.

By setting your employees up with a good workplace retirement benefit, you are giving them a gift that could be worth hundreds of thousands of dollars to them over a lifetime, putting them on a path to financial health that they would likely not otherwise get on.

This isn’t to say that other benefits (e.g., health and dental, life insurance, disability insurance) aren’t valuable. But given the importance of retirement saving in people’s financial lives, as well as Canada’s publicly funded health care system, for most people retirement savings is likely to end up being the more important benefit financially.

The benefits of compounding

If you wait until later to introduce retirement benefits, many of your team members will miss out on one of the most important keys to retirement success: starting early. Delaying is one of the most common mistakes both individuals and organizations make when it comes to retirement saving and planning. Because retirement is so far away, it’s easy — almost human nature — to put off action until tomorrow. But precisely because retirement is so far off, starting now has outsized benefits.

Other workplace benefits don’t have this kind of compounding benefit. They’re nice to have. They help cover employee expenses. They protect you if something really bad happens to you or your family. They can make work more fun or more pleasant. They can help your employees get healthier. But they don’t necessarily come with a multiplier effect for introducing them early. The underappreciated power of compounding is why personal finance experts like former Wall Street Journal personal finance columnist Jonathan Clements have talked about using a “retirement first” approach to saving, contrary to the trap some people can fall into of only getting around to saving for retirement once they’ve paid off their loans, saved for a house, saved for their children’s post-secondary education, and so on.

It’s a big source of stress — whether employees tell you or not

“But my team isn’t interested in retirement saving! They’re young and are only worried about today.” There’s a reason you may not be hearing about financial insecurity and retirement anxiety from your team. These are not comfortable topics to discuss, especially with your employer. Many Canadians are too overwhelmed, embarrassed, or ashamed to ask questions about this topic. But that doesn’t mean they aren’t worried about it. The very fact that people have a hard time talking about money is a source of stress.

So while the water cooler chat may not be about retirement benefits, data about how Canadians feel tells a different story:

• A whopping three quarters of Canadians are worried about not having enough money to retire
• 25% of Canadians say they spend about 40 minutes per day at work distracted by personal finances — there’s a very real cost of financial stress to business
• 43% of Canadians report living paycheque to paycheque
• Covid has likely made the situation worse, with 59% of Canadians (and 73% of gen-Zers) saying they are worried about the effect of the pandemic on their savings and retirement plans

It’s easier and more affordable than you think

A lot of small and medium employers perceive retirement benefits as a “big company” thing to do. They think it’s complex, expensive, burdensome, requires a department of people to manage, and so on.

This is an understandable but outdated perception. It’s true that traditional pensions are highly complex to administer and inappropriate for most SMEs in today’s economy. It’s also true that traditional providers have made offering a retirement plan for SMEs more complicated and expensive than it needs to be, overcharging employees and overburdening HR and finance teams.

But today there are more straightforward options. Advances in technology have made it much easier to offer a plan, digitizing the member and employer experience, reducing errors, and saving your team hours or even days every payroll cycle. Costs have been driven down and providers, like Common Wealth Retirement, are able to offer plans to SMEs at rates previously accessible only to large companies. Plan design can also be dramatically simplified so that employers do not need to become investment or retirement planning experts in order to set up and oversee a plan.

There are also cost-effective ways to provide an employer match. If you are starting from zero, it’s not necessary to have a 10% or even a 5% match in order to add meaningful value to your employees. You can start with something more modest, like a flat-dollar match, and work your way up from there. When we work with employers to come up with a customized matching plan to meet their budget and team’s needs, they are usually surprised by how affordable the all-in cost of a program can be, especially compared with the cost of other forms of employee compensation or benefits.

Stand out from the crowd

Especially if you’re a smaller employer, with fewer than 100 employees, offering a good retirement program can help you differentiate yourself from the competition. Most smaller employers don’t offer retirement benefits, so you can use this as a talking point in recruiting conversations and as a unique aspect of your employee onboarding. In a competitive market for talent, it could give you that edge that helps you land that ideal candidate.

Do the math

While “retirement first” may not be the best approach to employee benefits for every employer, we think employers should consider it more often than they do, especially in light of what advances in technology and plan design have made possible. At a minimum, employers should avoid falling into the outdated conventional wisdom that retirement benefits can wait, or that they are something that only big organizations do.

Think about the return on investing in an easy and affordable retirement program, compared to investments in other forms of compensation or perks. If you’d like to talk about what a business case might look like for your organization, one of our employer solutions specialists would love to connect with you. You can schedule a free consultation here.