Tom: I believe firmly we have a retirement savings gap in America And the work that I do, I'm an incredibly passionate about it because we're helping to build wealth in America.
Rodney: You have challenges, and you're looking for solutions, and that's especially true when it comes to workplace financial benefits. Your employees have their own set of life goals and trust you to help them along their financial path. What makes a difference? How you support them through inevitable economic changes. I'm Rodney Bolden, Vice President for Morgan Stanley at Work Financial Wellness. On this podcast we'll talk about what we've learned and how you can provide your organization with some much appreciated clarity and education around workplace financial benefits.
For the first time ever there are currently five different generations in the workforce, all at once and all with different financial perspectives and needs. Retirement planning has continued to evolve and become more complex. And together these things have created a situation so unique that it led to the passing of the Secure Act 2.0. We're just now starting to see the ways this new legislation will impact what we offer and how we talk about retirement solutions going forward.
How can HR decision makers identify and meet the needs of Generation Z and baby boomer employees at the same time? What are the immediate impacts and longer term takeaways from Secure 2.0? And how can you make sense of it all and help your employees do the same? That's why I'm talking to Tom Conlon, the Head of Retirement Sales and an Executive Director for Morgan Stanley at Work. Tom has done it all when it comes to retirement options, from building 401(k) solutions, to digging into the fine details of state government retirement plans, and more.
Together we'll chat about his thoughts and share lessons learned on addressing the retirement needs of each generation in this changing environment. Tom, welcome. I have been looking so forward to this conversation because retirement has been on my mind just like I know it's been on the mind for employers. Because there's a lot being written about retirement right now, a lot going on. First thing, I read something recently and I want to ask you about it. There are currently five generations in the workplace, and that's never happened before. Can you tell me, what are the five generations?
Tom: Yeah, Rodney. Great question, and thanks for having me here today. It's certainly a pleasure to be here. Yes, indeed. For the first time ever we have five generations in the workforce. Some of our oldest workers right now are part of the Silent Generation as we call them. We of course have our baby boomer generation. We have Gen X or Generation X. We have our millennials. And we have Gen Z. So if you think about it, we are spanning decades of folks that are in the workforce. Each come with their own particular sets of needs and circumstances. And employers are, quite frankly, trying to figure this out.
Rodney: What are some of those needs generation by generation? Let's start with Silent Generation.
Tom: Absolutely. Silent Generation, as the name implies, is usually not the first to give you feedback. So if you are an HR professional and some of your younger workers may proactively offer you feedback, this is not the generation that's going to do that. They really value face-to-face interactions. When they make decisions, they tend to be very analytical, very thoughtful. Contrast that with some of the new generations, especially Generation Z, in the workforce.
They'll be very proactive in telling you what their opinions are, what their ideas are, and they feel very open to sharing that feedback with human resources professionals, with their managers. They also don't need a lot of face-to-face interaction. Although in some surveys it's interesting, they do find that valuable. But in general, they're expecting digital communications. They're expecting digital on-demand tools. I will say about Generation Z, this is the best savings generation in a long time.
Rodney: I've read that. I find that fascinating.
Tom: Growing up, this generation saw, and maybe their parents were impacted by, the financial crisis, by certain life events. So saving and allocating money, and just growing up around the need to have financial security, perhaps that's a motivating factor. But this generation is engaged. This generation knows how to access information. They're very, very receptive to communication.
Whether it's emails, or short videos, or podcasts, or blogs, they consume a lot of information they find interesting. So if you're an employer and you want to engage these younger workers, or maybe you're out there recruiting, we know that recruiting is really, really important, think about your workplace financial benefits and think about if you're targeting this generation how you can speak to them about these workplace financial benefits because it really resonates with them.
Rodney: Let's talk about baby boomers for a moment. The youngest baby boomers are around 59. Retirement is coming right up. Can you tell me about what plan sponsors should be aware of if they have a good size population of baby boomers? What are some of the things that they should think about when trying to help them prepare for retirement?
Tom: Yeah. The baby boomer generation has needs unlike any other generation, because this is in large part the first generation that is exiting the workforce that probably is not covered by a defined benefit pension plan. Combine that with elder care needs, they might have their parents still with them. They need to plan for that. They need to plan for their own health care pre and post-retirement, and of course generating income from their 401(k) plan or other pools of assets that they have.
So having a financial professional or having some sort of counseling for this generation is enormously important and enormously valuable. We find that tends to keep these employees engaged in their later years if you're able to help provide guided experiences with these benefits. This generation has complex needs, and the value of guidance, and education, and sometimes advice is really truly valued.
Rodney: Now, coming up right behind the baby boomers are Generation X.
What can you tell me about Generation X in terms of retirement?
Tom: They have a lot of catching up to do. This generation in particular as they are coming up through the workforce, by this point defined-benefit plans were largely frozen, terminated, non-existent. So all of the wealth accumulation that needed to occur was through 401(k) plans or on their own.
And generally speaking, their account balances relative to where they should be when you look at the average 401(k) balance for this generation, they're behind. They really need to play catch up. Now again, that's not true for everyone in this generation. So if you're an employer and you have Generation X employees in your workforce, they may value some additional guidance on ways to maximize savings or ways they can set aside additional funds for their retirement.
Rodney: Let's talk about the millennials, which comprise the biggest percentage in the workforce right now.
Tom: That's right.
Rodney: What are some things that employers, if they have a large millennial workforce, what should they be delivering to help millennials better plan for retirement?
Tom: This generation when they entered the workforce, generally speaking, was swamped in student loan debt. The cost of college as they were coming up relative to prior generations just exploded. Year over year the inflation rate of tuition and the overall cost of college increased significantly. So when they entered the workforce, retirement savings was not number one. It may not have been number two, or three, or four.
So if you're an employer, if you poll this generation, they'll probably tell you student loans are very important and retirement is not as important. Hence, some of the recent legislation that has come about in Congress recognizing the need to say, "It's not either/or. Sometimes it's both." Meaning, both paying down student debt and saving for retirement. Maybe there's ways to do both.
Rodney: I'm glad you mentioned that. Because two of the greatest impediments I've seen to retirement and retirement saving are my level of debt and also caregiving, having to care for either younger children or elderly parents. Let's talk about debt and caregiving, and how it impacts retirement.
Tom: Yeah. It's incredibly difficult to sit down and allocate more money to saving for tomorrow when you have immediate needs today. So if you have a lot of debt, whether it's you financed vehicles or potentially credit card debt, you better have the funds to make those payments. Combine that with elevated costs of long-term care potentially for a parent or needs for a parent, that could be incredibly expensive. So not only is it worrisome from just the emotional burden of having to care for a parent, but also the financial stress that comes with it. And again, those are immediate problems. So allocating towards retirement is a tomorrow problem.
Rodney: Now, let's talk about Secure 2.0, because I believe you were alluding to that earlier.
Let's talk about first, How did it come about? Why did they have to go back to the drawing board and add more?
Tom: If you look at the themes of both of the Secure Acts, the first Secure Act, and Secure 2.0, the legislature was trying to tackle a couple of different problems. But thematically, the first and most important problem is coverage. When you look at the US and you look at coverage, workplace coverage of retirement plans, with small employers not everyone has a 401(k) plan. When you get to really small businesses, most businesses don't have a 401(k) plan, and that leaves millions of Americans that don't have a workplace savings vehicle.
So when you think about that, that poses some problems in the future potentially. We know that Social Security won't give you a high income replacement ratio always. Your expenditures during retirement are probably more than what Social Security provides to you. So the Congress and the legislature felt we should offer incentives for employers to sponsor workplace savings because that's how people accumulate wealth. The major ones that we're hearing from the marketplace that has the most immediate impacts, number one are the tax credits. The tax credits for small employers that sponsor their very first retirement plan are doing a tremendous amount to reduce that hurdle for employers.
Rather than saying you need to opt into your retirement plan to defer, you need to opt out. And that little bit of inertia, that little bit of push forward, that nudge to get you to save from your very first paycheck, that's probably created more wealth in the workplace and workplace financial benefits than any other legislative provision. Because you now have employees who previously wouldn't have saved, now you have them saving, and they're saving from each and every single paycheck.
Rodney: I mean that makes so much sense. If I started a company and 3% is automatically enrolled into my 401(k), my first paycheck, "Okay. This is my paycheck." Rather, if I start, I get my first paycheck and like, "Okay. Now I'm going to save for retirement." Ooh, it's less next time. I'm not even going to miss it if it starts from day one.
Tom: Exactly. That's exactly right. I can't stress enough how valuable that is to employees building financial security through their workplace financial benefits. If you are an employer and you don't have it, seriously consider. Latest statistic that we have is, nine out of 10 people choose the default. They don't opt out. We think this will really move the needle for a lot of people.
Rodney: You also talked about millennials and student loan debt. Anything that can help millennials, and help employers rather, help those millennials and others deal with student loan debt?
Tom: Yes, there is. In recognizing that a lot of employees feel that there's an either/or choice, either I pay down my student loans or I save for retirement. And if they pay down their student loans and they're not contributing to the retirement plan, guess what happens? They lose their company match. So what was proposed and ultimately enacted in Secure 2.0 is giving employees that relief to say, "If you make your student loan repayments, employers are allowed to match in the 401(k) plan."
Secure 2.0 does offer all of those incentives for people to pay down their student loans and still accumulate wealth in their retirement plan.
Rodney: What are some of the other provisions that you think our listeners would really like to know a little bit more about?
Tom: One of the big ones I think about are changes to required minimum distributions. For years, and years, and years, it was always at age 70-and-a-half, you have to take these required minimum distributions. Meaning, if you have a 401(k) or an IRA, in general, you had to distribute a minimum amount per year to satisfy that requirement. What the first Secure did was change that age, the required beginning date.
Then the second Secure changed it even further, and changed some of the other provisions. I think that's very reflective of the fact that people are working longer. So we talked about five generations in the workplace, so updating the legislation and all of the statutory provisions to reflect that people are staying in the workplace longer, people are living longer. The required minimum distribution I think is a big one.
Rodney: So it sounds like the legislation provided employers with a lot of tools to support their employees. Is there a timeline as to implementation of different aspects of the legislation, and can you share a little bit about what that timeline is?
Tom: Oh, man. How much time do you have, Rodney? So there is, and it depends on what you're talking about. Some of the provisions we actually need maybe a little bit more interpretation from the Treasury Department or other departments on implementation of some of these rules. I can tell you the tax credits are immediate, which is fantastic. So if you're an employer, and you're listening, and you're thinking about, "Is now the right time to do this? Are these tax credits right now," the answer's yes.
So talk to your financial professional, talk to someone in the benefits industry to learn more about these tax credits so that you do get workplace coverage. Some of these provisions are later on in implementation. I talked about RMD going up. That's phased in over time. So it all depends on the provision and when it takes effect.
Rodney: Tell me about things that you've seen that have worked well when implementing a retirement plan, and things that have not worked well, and how do you correct for those?
Tom: What's worked incredibly well is being very thoughtful when you establish your retirement plan. So often when it doesn't go well is when you rush through the implementation process and you check boxes, and you go to get your employees set up, and they have a lot of questions. They don't know what any of this means. They're frustrated because they may have a preconceived notion on how a particular workplace financial benefit like a 401(k) plan works.
That lack of preparation and that lack of communication leads to employee confusion. And while you may have wanted to implement a 401(k) plan to serve your employees, all you've done is confuse and frustrate them. So where I've seen implementation go right, you're very thoughtful about your plan design. You're very thoughtful about automatic enrollment that we talked about and automatic escalation.
You're thoughtful about your default funds and your default investments, and you put in place a process of governance and oversight. You work with a financial professional where you get guidance on communicating with employees and making sure there's clarity in what the benefit is. I can't stress that enough. Investing that time upfront and then a little bit of ongoing oversight really makes these programs a wonderful success.
Rodney: Now, if I'm an employee, I get my 401(k) summary plan document and it's a hundred pages, I don't know where to start. Talk to me about the potential value of a financial advisor when it comes to helping employees get along the path to planning for retirement.
Tom: Here's how I think about a financial advisor, especially in the workplace. I like to think about a journey. Sometimes your journey might be short. It might be a trip over one or two towns, and a GPS that's like automated is totally fine. I liken that to an online calculator or some sort of tool, and that's fine. If your journey is going up Mount Everest, you need a Sherpa. That Sherpa is your financial advisor or a financial advisor that an employer hires to bring into the workplace.
Whether it's providing 401(k) services, or financial wellness services, stock plan services, a financial advisor can provide these guided experiences to employees so that they don't go home with a hundred-page summary plan description and try to sit down with their spouse and make sense of what this means for their financial future. Because that's incredibly hard.
It's like saying, "Hey, climb Mount Everest. Here's a stick. Good luck." You're not going to do that. You're going to want that guided experience with that Sherpa who's been to that mountaintop, who knows the way there, knows where all of the obstacles are, helps prepare you. That's what a financial advisor is, and a financial advisor can make sense of that hundred-page summary plan description and say, "Rodney, this is what it means for you."
Rodney: Tom, coming to the end here, I want to ask you, looking at our listeners, what one or two takeaways from our discussion today that you want to make sure that they walk away with?
Tom: First and foremost, be thoughtful about your benefits. I can't stress enough how important it is to be thoughtful about your 401(k) plan, to have oversight and governance, and really make sure that the workplace financial benefit that you're offering is still in line with your company's strategy. Oftentimes, we implement these programs and things may get tight and we go through cost-cutting exercises. We're going to cut costs. We're going to cut costs.
And all of a sudden that workplace financial benefit doesn't quite do the thing it was intended to do, which is attract talent, reward talent, retain talent. So making sure that the way these programs are structured and designed still aligns to those corporate objectives. That's number one. Number two is, you have five generations in the workforce at the same time. They don't all want to be communicated with the exact same way. Know that you may need to change communication style, communication mode, so that you have a really engaged workforce.
Rodney: Tom, one more question for you. What makes you invested at work?
Tom: I believe firmly we have a retirement savings gap in America And the work that I do, I'm an incredibly passionate about it because we're helping to build wealth in America.
Rodney: At the beginning I said that I was looking forward to this conversation. Tom, it did not disappoint. Thank you so much for joining me today. Have a wonderful rest of your day.
Tom: Thank you. Appreciate it, Rodney.
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