“I’ll take a 50% cut in pay, and I’m cool with downsizing my retirement” – Said No Employee, Ever

By Tom Charla, Director and Tara Reynolds, Corporate Vice President, MassMutual

Most employees have figured out that the safety nets previous generations enjoyed — job security, pensions, even Social Security – can’t be relied on the way they have been in the past. They know that when it comes to reaching their financial goals, especially the goal of a comfortable retirement, they are pretty much on their own.

At the same time though, employees are expecting, even requiring, that their employer — the same one that no longer provides much of yesterday’s safety nets – make available the benefits, financial planning and educational opportunities needed to make informed choices about their future. Your employees and colleagues are counting on you to help them understand what action they most need to take next, especially during open enrollment season.

How do employees define “financial well-being?”

As an employer, you can distinguish your company and provide peace of mind by offering benefit options that closely align with your employees’ overall financial well-being. Today, financial well-being (aka ‘financial literacy’ or ‘financial wellness’) is a bit of a buzzword, so it helps to define what it means. According to the Consumer Financial Protection Bureau, financial well-being is achieved when an employee is able to:

Manage day-to-day and month-to-month expenses
Absorb a financial shock
Stay on track to meet their financial goals, and
Make financial choices that let them enjoy life

Now vs Later… and Everything In-Between

The CFPB definition calls clear attention to both the short and long-term considerations to achieving financial well-being. At the same time, with 78 percent of all workers living paycheck-to-paycheck¹, longer-term plans often fall by the wayside. Without having a long-term financial view, employees may make money mistakes with long-term consequences — such as making withdrawals from their retirement accounts — to address a short-term concern.

As hard as it is to balance priorities, it’s even more devastating for individuals and their families when they get caught short by overlooking the financial and emotional damage that a potential disability can cause when adequate disability income insurance (DI) coverage is not in place. A disability of any significant duration can result in immediate lost income, as well as the inability to continue to save for retirement.

For the employer, having an adequately protected employee can be very beneficial for the business as well, especially if that disabled employee comes back to work. A recent survey conducted by MassMutual found that business owners believed that over 40 percent of their employees would not be able to retire on time (traditional retirement age) because of inadequate savings. The inability of employees (including those who returned to work after a disability) to retire on time can have long term impacts on the business itself. Increased future payroll and benefit costs, delayed succession plan implementation, and even a potentially lower perceived value of a small business when it’s time to sell, can all be the result of employees having to work past retirement age.

What are the chances?

For many people in the workforce, and for their employers, it’s hard to predict when and how a disability will strike. Yet with today’s 20-year olds facing a 1 in 4 chance² of becoming too sick or hurt to work before they reach age 67, a disability that could keep them out of work for an extended period can happen at any time. As employees age, the risk of a disability naturally increases. That’s because most long term disabilities, about 90 percent, are caused by a sickness, not a catastrophic injury³. As employees age, so do their chances of a prolonged illness due to cancer, musculoskeletal or nervous system disorders.

When you review your benefits package and align it with the CFBP definition, you’ll quickly see that DI is one of only a few benefits that can have a direct impact on all four parts of an employee’s financial well-being. And it’s in this analysis that we start to uncover how devastating a disability can be, even for an employee who may have dutifully saved for retirement up until the time of their disability.

A comfortable retirement is most everyone’s long-term financial goal

When an employee becomes disabled and can’t work for an extended period of time, managing for the short-term is critical. Retirement balances can get tapped for more pressing day-to-day necessities, or to cover increased medical costs, hiring additional help, home safety accommodations, etc.

However, managing for the long-term is equally important. It’s hard enough to deliver the news to an employee that their group long term disability coverage may replace only roughly half their paycheck (after taxes) at a time when their expenses likely will skyrocket. You will have to help them understand that their ability to contribute to the employer sponsored tax-advantaged retirement savings account – including any company matches – will no longer be available to them. And this realization may occur just at the time they are tapping into their retirement balances to help make ends meet. Do you relish breaking the news of a big pay cut and a major hit to your employee’s retirement account?

Individual DI policies, such as those from MassMutual, have an option for an employee to continue saving for retirement in addition to protecting a larger portion of their income. This allows an employee whose life has been interrupted by a disability to be confident that they can continue to fund some aspect of their future retirement, especially knowing that their disability income payments cease at the end of the disability benefit period (and certainly no later than at their normal retirement date.)

DI can set you apart

You know the right benefits package can help you attract and retain the best talent for your company. So it makes sense to offer benefits that employees want. According to 2018 MassMutual Workplace Benefits study, 78 percent of employees identified DI as a benefit they would be interested in, and almost as many – 74 percent – would like to have a benefit that provides continued retirement savings protection while the employee is disabled.⁴

But benefits packages are more than just employee retention tools; they reflect who you are and what you believe. When you offer your employees DI, you demonstrate that you want them to be financially well for the short and long-term. This approach to benefit planning also helps you position your company as one that cares about its employees, and is actively seeking to offer tools and programs that are in the employees’ best interest. That’s a message all of us can get behind!

¹Career Builder / Harris online poll conducted June 2017

² US Social Security Administration, Fact Sheet 2018

³ The 2014 Council for Disability Awareness Long Term Disability Claims Review

⁴ Survey conducted for MassMutual by Greenwald & Associates in 2017