A person who’s returning to the workforce after a long period of unemployment might be happy simply to have a job again. But while getting a job offer is a key step toward more financial security, new employees still have major decisions to make regarding retirement planning and benefits. While it’s important for employers to offer a 401(k) plan and solid benefits, they should take further steps to ensure new employees understand their options, Lynn Pettus, national director of employee financial services at Ernst & Young, said in a recent interview. This is an edited version of that interview, with advice for employees and employers.
What are some steps employers can take to make sure employees have all of the information they need to make sound decisions regarding a 401(k) plan, particularly those who are returning to the workforce after being unemployed?
[New employees] might have been under financial stress, which can take a mental toll. Clear and concise communication is important. A highlight brochure or a summary of information is often helpful for an employee to read through quickly. A number of employers and our clients will offer workshops, webinars and counseling so employees can understand and prioritize within the financial-planning picture.
What about helping new employees understand benefits? The employee could have experienced major life changes, such as a wedding or the birth of a child, in the time they spent unemployed. He or she might have dependents when previously that wasn’t the case.
They might have lost a spouse, [have to] pay down expenses, credit card debt. It’s strongly incumbent on the employer to offer benefits and to put them in the context of the broader financial picture and help employees prioritize. It helps the employer and the employee long term. It makes them more focused and loyal and helps them hit the ground running and gets them back on track from a financial perspective.
Along those lines, what are some typical W-4 recalculations that new employees and employers should be aware of?
We see that when a lot of employees enter the workforce or re-enter the workforce, whether [the changes are] a salary increase or sometimes a salary decrease. What we don’t necessarily recommend is making big tax withholdings and getting a big refund at the end of year — basically, it’s a loan to the government. Does your spouse work? Do they have withholdings? [The goal is] to make sure you’re paying enough, but not too much.
How soon should an employee sign up for a 401(k) after returning to the workforce? Are there particular investments, or types of investment plans, that new employees should look into based on their number of years in the workforce or the point in their career?
We would like to have them enroll as soon as possible under the employer plan. They might not get [an employer] match right away, but it’s important for them to start saving for the future. Typically a blend of assets, not only fixed income or more aggressive investments — it might be growth, it might be some fixed income. Any outside income and length of career, also look at that. Also, you should have some more growth-oriented investments even late in your career. You still have [many] years in retirement that you have to help fund.
What is the employer’s benefit in making an extra effort to fully explain benefits and retirement savings? It seems morale will improve if employees feel taken care of by their employer.
A lot of employers use this for attraction and retention for building employee morale — also for productivity. Because more times than not, employees are worried [about financial issues] and dealing with it at work. It’s really to help the employer get the most out of the employee. It’s also risk mitigation: If employees are changing plans, the employer should make sure they understand the plans and plan for the future and take advantage of benefits. The employer also should help them think through the process and make sound financial decisions — it really is to the benefit of the employer.