The Value of Pension Education for the Public Workforce

Retention

Defined-benefit pension plans have long been called “golden handcuffs” because most of their value is earned in the years just before retirement. But again, this is an abstract idea. Illustrating the specific loss an employee would experience by leaving their job early can help them understand the significant financial decisions they are making. For example, consider an employee with 25 years of service who is contemplating leaving their job for the private sector rather than staying five more years. Assuming a 3% raise, their monthly pension benefit would be reduced by 28%. If they earn $5,000 a month and receive a 1.8% credit for each year of service, the loss of income over 25 years in retirement is more than $425,000. (In this case, the loss of income is so significant that even the maximum 401(k) contribution in a private-sector job would not outweigh the loss of value.) Providing employees with specific projections can help them understand the ramifications of their decisions.

Financial Wellness

Financial wellness gives employees peace of mind about their financial situation, including retirement planning. Unfortunately, many financial advisors do not provide public employees with an integrated benefit analysis that includes their pension system. This is especially true for middle-income Americans. In contrast, PPC contributes to employees’ financial wellness, which has been shown to reduce stress, increase loyalty, improve morale, and increase employee engagement.

Benefit Appreciation

Pension plans are a significant investment in employees’ future but are often the dark horse within the benefits package. All the other benefits have shorter-term utilization, are integrated with employer policies, and generally are appreciated for what they provide. In contrast, retirement benefits are deferred, which means employers must be proactive in helping employees appreciate their value. Providing a personal, visual, interactive explanation of how defined-benefit plans provide retirement income can help employees to understand and appreciate the plan’s value.

Clearer Information

When employees are not educated about their pension plan, inaccurate and fear-inducing rumors typically fill the void. After a recent presentation at a school district where PPC was being launched, a teacher approached the presenter and expressed concern about the value of her pension. “I know it’s not worth much,” she sighed. He asked how long she had been working, and she replied she had 27 years in the pension. This meant she would likely receive well over a million dollars of distributions over her life expectancy, but she had no idea. He then asked why she was so concerned. She responded that she was in Tier 2 of the pension and had been told by Tier 1 members that her benefit was much lower than theirs. Rumors had filled the void of education and replaced what should have been appreciation with fear, causing unwarranted anxiety. Proactive education for employees about the value of the defined-benefit plan can eradicate these and similar rumors.

Employee Morale

As mentioned in the Financial Wellness section, retirement planning can help with employee morale. But PPC goes beyond just retirement planning by showing the total pension income an employee can anticipate over their life expectancy. This can foster additional appreciation for how well the pension system provides for their retirement.

At a recent conference for schools, a young business officer stopped by our booth and shared that she had degrees in finance and accounting and was comfortable with numbers. She asked if the booth staff could run her retirement projections, and we quickly entered her data. In a few moments, she saw that her projected income in retirement from the pension was over three million dollars. She began to shake and, with tears in her eyes, said, “I’m never leaving my job.” The eye-opener for her was a concrete understanding of what she was projected to receive in retirement.

Long-Term Planning

Retirement savings cannot be achieved in a few short years, but many pension plans’ support desks provide assistance only five years out from retirement. This does not give employees enough time to plan for the financial needs of retirement. This is especially problematic with pension systems that have introduced tiers with lower retirement benefits, making long-term planning critical.

An HR officer once shared how two employees had come into her office to retire, only to find out they were not ready. They both cried as they sat in her office, realizing they needed to keep working. The HR officer said she never wanted to go through that again. PPC provides public employees with the opportunity to understand how to prepare for retirement years before it becomes a reality. It encourages employees to avoid oversimplifying their approach to retirement, mistakenly thinking that the only important factor is when the plan allows them to retire.

Labor Negotiations

Benefits typically play a key role in labor negotiations, helping employees understand their complete benefit package—but the lack of education about the value of the pension reduces its role. PPC helps leverage the pension system like never before because it provides concrete information about the value of the pension plan to every employee. Management can stress the value of the lifetime income for every employee, positioning the pension benefit as a key part of the total benefits package.

Transition of Highly Compensated Employees into Retirement

Employees often feel insecure about their transition into retirement. One cause for this is not knowing how well their retirement is funded, and that uncertainty can lead to delays in the decision to talk to an advisor. This keeps highly compensated employees on the books. PPC provides a quick and easy solution for employees to review their financial situation, which can transition a hesitant individual into one who is engaged and confident to take the next steps. This facilitates moving higher-income employees into retirement, thereby reducing the payroll and benefit costs for older employees.

In short, PPC is a transformative solution that bridges the gap between public employees and their pension benefits. By providing personalized education, financial clarity, and long-term planning tools, PPC empowers employees to make informed decisions about their retirement and fosters a workplace environment where the value of the pension system is truly appreciated. With PPC, public employers can leverage their investment in employee retirement benefits to enhance recruitment, retention, and morale, ultimately ensuring a brighter financial future for their workforce.