In an era where we are constantly looking for the next big thing, it might be a surprise that the future of employee benefits isn’t some cutting-edge innovation. Instead, it’s rooted in something that’s been around for over 40 years: the 401(k) plan.
With the passage of the SECURE Act 2.0, we have a unique opportunity to reshape this tried-and-true benefit to meet the evolving needs of today’s workforce. This is especially critical, as the Financial Health Network reveals in their Financial Health Pulse 2023 that many families across the U.S. are struggling financially, underscoring the need for robust and accessible financial wellness solutions.
Meet ALICE
These families mentioned in the report are what the United Way of Northern New Jersey calls ALICE Households, which is an acronym that stands for Asset Limited, Income Constrained, but Employed. In other words, a household struggles financially to meet its basic survival needs. They have a negative cash flow, have little to no liquid savings, pay late and overdraft fees every month, spend on average 25% of their income servicing high-interest consumer debt, and, as a result, are not able to save for the future in their company’s 401k plan. In 2018, there were 35 million ALICE households (29%) nationwide, and when combined with households below the Federal Poverty Level (FPL), a total of 51 million U.S. households, or 42% of all households, are struggling to make ends meet.
A Timeless Solution for Modern Challenges
The 401(k) has long been a cornerstone of retirement planning, but its potential extends far beyond just saving for the future. The SECURE Act 2.0 brings new flexibility and enhancements that make the 401(k) more relevant than ever, addressing the immediate financial wellness needs of all employees, not just those in a position to save for the future. It all comes down to retirement plan design. With SECURE Act 2.0, advisors and their Record Keepers are now able to design plans that leverage technology to create behavior change using tools like auto enroll and auto escalate but in a way that is in the best interest of the needs of the participant based on where they are at in their unique financial journey. You can think of it like Dave Ramsey’s baby steps but fully automated in the employee’s 401k plan so that they can leverage automation to help them stay on track. These steps include assisting the participant with their cash flow and unplanned expenses, building liquidity for emergencies in an Emergency Savings Account (ESA), paying down their high-interest consumer debt, and saving money for retirement.
Unplanned Hardships: Life is unpredictable, and financial hardships can sometimes strike. The updated 401(k) plans now allow for penalty-free withdrawals in specific emergencies, helping employees navigate life’s challenges without compromising their long-term financial security.
Building an Emergency Savings Account: The pandemic highlighted the importance of having a financial safety net. With new provisions, 401(k) plans can now include an emergency savings feature, allowing employees to set aside funds for short-term needs while contributing to retirement.
Paying Down High-Interest Debt: High-interest debt is a significant burden for many employees and a major barrier to financial wellness. The updated 401(k) framework provides options for employees to use part of their contributions to pay down debt, helping them achieve financial freedom faster.
Saving for Retirement: Of course, the primary purpose of a 401(k) remains saving for retirement. With enhanced features like automatic enrollment, increased catch-up contributions, and employer matching, these plans are more powerful than ever in helping employees build a secure future.
A Modern User Experience
One of the main reasons that people struggle to accomplish their financial goals is that the user experience (UX) of traditional financial planning is time-consuming, mentally draining, and just plain hard. One of the most basic rules of designing solutions for consumers is to remove these barriers to behavior change. The mantra that many product designers try to solve for is “Don’t make me think” and “Don’t make me work.” While this may seem lazy and selfish to some, we must work to develop elegant solutions that solve these requirements if we are going to move the needle on financial well-being for all.
Ease of Use: Modern employees expect seamless, intuitive digital experiences. This is how their brains have been conditioned to think about all the products they love being designed by companies like Google, Apple, Netflix, and Amazon. By integrating user-friendly interfaces and mobile accessibility, employers can make it easier for employees to manage their 401(k) plans on the go, whether checking their balance, adjusting contributions, or preparing for retirement.
Automation: The best way to ensure employees take full advantage of their 401(k) benefits is to make it automatic. Automatic enrollment, automatic escalation of contributions, and automated investment options can all help employees save more effectively without actively managing their accounts. Over the years, these features have been proven to drive participation in plans, but now we can use the same automation concepts and apply them to the lower hierarchy of needs, such as non-retirement savings and debt.
Incentivization: Matching contributions have always been a powerful incentive for employees to contribute to their 401(k) plans. But beyond the traditional match, employers can explore creative ways to reward employees for smart financial behavior, such as bonuses for paying off debt or building up an emergency fund.
The Benefit of the Future is Already Here
As we look ahead, it’s clear that the most impactful employee benefit is not a novel invention but the 401(k) plan, updated for the needs of today’s workforce. By leveraging the flexibility and enhancements made possible by the SECURE Act 2.0, employers can provide a comprehensive financial wellness solution that addresses immediate and long-term needs.
This renewed focus on financial wellness is gaining traction, as evidenced by initiatives like the recent $7 million funding secured by Commonwealth to support low-income employees in building financial security. These efforts highlight the importance of making traditional benefits more accessible and effective for all employees, regardless of their income level.
In a world where everything seems to be changing at lightning speed, the future of benefits is, in fact, a thing of the past—rooted in the basics of financial wellness, delivered through a 401(k) plan that has stood the test of time. With the right updates, this benefit can continue to support employees for decades to come, proving that sometimes, the best innovations are the ones we’ve had all along.