The more research I do in these areas, the more I’ve come to appreciate the important similarities and interconnectedness of workplace disability insurance and retirement plans. At their core, I believe these benefits aim to achieve the same goal – income replacement.
Employees save for retirement, albeit modestly, not to simply have a pile of money at age 65, but rather because of the income that money can provide when they are no longer working. Many of Greenwald’s studies show that being able to generate retirement income from savings is just as important to employees as being able to save enough in the first place, if not more so. The end goal of retirement savings is income.
Disability insurance also aims to replace income. In addition to other known benefits, it protects an employees’ ability to continue saving for retirement if there is a stoppage in work. A disabling event can bring an employee’s already shaky retirement plan to its knees. And it’s far more common than most employees and employers think. Disabled employees may stop retirement plan contributions or may withdraw or take loans from retirement plans to make up for their lost income. A study conducted for Unum and CFA in 2013 found that more than four out of five disabled employees (85%) cut back or completely stopped saving for retirement and another 67% used savings that were intended for retirement to support themselves during their disability. Among those receiving long-term disability benefits, only 7% cut back on retirement savings.
The perceived importance of these benefits, however, is dramatically different. Employers and employees have now long accepted the importance of workplace retirement plans and the need to save. Retirement benefits rate as the second most important benefit for employees, following health insurance, according to the 2014 Health & Voluntary Workplace Benefits Survey conducted by EBRI and Greenwald. While six in ten call health insurance most important, retirement plans rank a distant second at 12%. Just 1% of employees feel disability is most important, and another 4% call it second most important.
The recognized importance of retirement plans drove plan providers and employers to adopt automatic enrollment, and now auto-escalation. But here’s another interesting similarity between retirement plans and disability insurance – employees favor automatic-enrollment into both. Two-thirds of employees believe it is good idea for employers to automatically enroll employees into a disability insurance plan and set up automatic contributions from workers’ paychecks. This is the same share of employees who favored automatic enrollment into retirement plans back in 2009. This is encouraging news that, along with other data, suggests that employees understand their need for disability coverage perhaps better than their employers do and they are willing to be defaulted into plans that can help them.
I look at the common goal and interrelated nature of these products and can’t help but think that we’re missing an opportunity to elevate the perceived importance of disability insurance by tying it to retirement and retirement plans. Perhaps all we need is a change in messaging or positioning or perhaps it’s a product or rider that guarantees retirement plan contributions continue if one becomes disabled. However we approach it, I believe employers and employees need to better understand the impact a disability can have on our most important financial goals – saving for retirement and retirement income. We have to connect the dots and I don’t think it’s that big of a leap. Use disability coverage to protect retirement. Use retirement to elevate the importance placed on disability coverage.