Tailoring Plan Designs to Reflect Shorter Employee Tenure

A recent Employee Benefit Research Institute (EBRI) brief examined employee tenure among American workers, finding that in the past 35 years, the median tenure for workers of all wages and salaries, ages 25 or older, has remained at five years.

However, for men ages 25 to 64, the median tenure stood at 10.2 years in 2018—a stark drop from the 15.3 years measured in 1983 but not as low as the 9.5 years measured in 2006. Women in the same age group held a median tenure of 4.9 years in 2018, a slight decline from 5.0 years in 2016.

Even as shorter tenures are linked to low unemployment rates and boosts in the economy, the EBRI report suggests the tenure drop correlates to a potential decline in retirement readiness. Lower levels of employee tenure may reduce the percentage of the working population that is eligible for or contributing to a defined contribution (DC) plan at any given time. In addition, even when shorter-tenure employees join a DC plan, they may face vesting periods and may need to draw on retirement assets to meet emergency savings needs.

Retirement plans can attract and retain talent

According to Timothy Brown, director of retirement plans business at Anderson Financial Strategies, when plan sponsors have a high quality 401(k), this adds significantly to employee satisfaction in the workplace, which in turn helps the company create and keep highly engaged employees.

“The retirement plan helps with recruiting and even training costs,” Brown suggests. “Emphasizing the retirement benefit helps participants learn the new company and culture inside and out, and it can create a sort of family feel.”

Joe Connell, partner at Sikich Retirement Plan Services, encourages advisers to work with their plan sponsor clients on a review of how well existing employees actually understand the retirement plan benefit being offered. Getting the workforce talking about the retirement plan will encourage greater participation, he says, especially as people learn about what their peers are doing with respect to saving and investing. There can even be a bit of a competitive spirit that develops within a group of workers that are newly engaged in saving for retirement.

And for plan sponsors, the exercise is often quite eye opening, Brown agrees.

“We’ve assisted plan sponsors in polling their employees and asking what they know about the 401(k),” Brown says. “It can be a real eye opener for the plan sponsor when they find out people that have been there for years really know little about the plan.”

Addressing tenure as part of participant education  

From the plan design perspective, Brown and Connell agree that automatic enrollment and automatic escalation are two key features that can help address shorter employee tenures from the retirement readiness perspective.

One additional idea Brown shares is to have longer-tenured employees act as advocates for the retirement benefit.

“Adding them as a resource for shorter-tenured employees can have one of the biggest impacts,” says Brown. “Some employees will go out and talk to the younger workers about how this retirement plan is critical for them, and that sort of thing often hits home. You are learning about the plan from somebody you’re working with every day, not just the plan sponsor.”

Craig Copeland, senior research associate at EBRI, who wrote the brief on employee tenure among American workers, echoes the same thought, emphasizing the credibility of longer-tenured employees in the eyes of new workers.

“Hearing specific examples of people doing well tends to help others understand what they can do to reach the same goals or benchmarks,” Copeland says.

Brown compares this relationship, between longer-tenured and younger employees, to the same rapport that can build over time between an experienced plan adviser and a novice plan sponsor. Just how younger participants can lack an understanding of key retirement plan features, when it comes to employee benefits, employers don’t always fully recognize the importance.

“For advisers, the key is being able to show both the plan sponsors and participants that the retirement plan can be a strong benefit,” Brown concludes.