Explore how automated plan features may create a win-win scenario by helping employees achieve retirement readiness to retire on their own terms while reducing the significant costs of delayed retirement.
Many of us are witnessing the changing face of retirement in our workplaces as the U.S. workforce is aging. The traditional retirement age, once a fixed milestone, has become more fluid. For decades, many workers retired at age 65, collecting pensions and making way for the next generation of talent. Today, more of our colleagues are staying in the workforce—some by choice, seeking purpose and social connections, but others feel compelled to stay out of financial necessity.
This shift affects both employees and employers in significant ways. For workers, extending employment beyond their desired retirement age can lead to decreased job satisfaction, physical and emotional strain, and delayed pursuit of retirement dreams.
Meanwhile, employers face real financial consequences. A detailed Principal® analysis found it costs an average of $103,000 each year in added compensation and benefits when an employee works past age 65.
In short: When retirement readiness falters, everyone feels the impact.
The good news is that plan sponsors can help employees retire on their own terms while addressing this challenge through proven plan design strategies. Automated features—specifically automatic (auto) enrollment, auto-increase, and annual re-enrollment—have proven successful in helping employees build adequate savings for a secure retirement. The potential impact of implementing such features could help employees save enough to replace 80% of their pre-retirement income at age 65.
The desired retirement age varies by person and industry, ranging from as early as 55 to 70 and older. For our calculations, we used age 65 and determined delayed retirement costs as the difference between what an employer pays an employee past their desired retirement age compared to a new hire. These costs are driven by:
- Higher salaries and bonuses
- Increased healthcare premiums
- More paid time-off
To put this in context, let’s calculate the annual cost of delayed retirement for an employer:
- Total employees: 1,000
- Average percentage of employees over age 65 in the workforce (2024): 6.9%
- Annual cost per employee age 65 and above: $103,000
$7.1 million: The approximate annual cost of delayed retirement for a 1,000-employee organization.
These numbers underscore that delayed retirement isn’t just a workforce challenge, it’s a recurring cost with strategic significance. And when employees have to delay retirement, the impact extends beyond the financial. It creates a ripple effect that we see play out in organizations daily:
- Career progression can stall. Workforce planning can become more complex when employees work longer than originally anticipated, affecting career development opportunities across all levels.
- Recruitment may suffer. With fewer openings, it may be hard to bring in new talent with diverse perspectives and skills.
- Succession planning can slow. Many employers are looking for meaningful succession planning strategies that support knowledge transfer while preparing future leaders at all levels.
- Employee culture might shift. When employees feel financially unprepared for retirement, it can affect job satisfaction and workplace engagement.
The reasons are complex, but most come down to insufficient savings. Nearly 40% of the U.S. working population aren’t saving enough to maintain their lifestyle in retirement.
- Transition from pensions. In the 1980s, employers began moving away from defined benefit (DB) plans in favor of defined contribution (DC) plans. This fundamental change transferred the responsibility of retirement planning and saving from employers to individual employees. Generation X, the first generation to enter the workforce during this transition, has been particularly affected and is now approaching retirement without adequate savings.
Active participants in 401(k)-type accounts now far outweigh those in pension plans.
Source: Congressional Research Service, Employee Benefits Security Administration
- Health care costs: A 60-year-old’s health insurance premiums on the Health Insurance Marketplace average nearly three times those of a 21-year old.
- Longer lifespans: At age 65, life expectancy now averages nearly 20 more years, which means savings must stretch further.
- Social Security incentives: Delaying benefits beyond full retirement age (67 for those born after 1960) can significantly boost monthly payments. Current research shows that 58% of retirees rely heavily on Social Security. For those lacking adequate retirement savings, working longer may feel essential.
In our work with plan sponsors, we’ve found that they can purposefully design plans to help improve retirement readiness—reducing the financial strain of delayed retirement and supporting employees in retiring on their own terms. The implementation of automated features can be especially powerful to help employees work toward the retirement industry recommended standard of replacing at least 70-85% of pre-retirement income for a financially secure retirement.
The trifecta of automated features—auto-enrollment, auto-increase, and annual re-enrollment—can be game-changers for retirement readiness.
- Auto-enrollment gets employees into the plan quickly, often boosting participation rates by 37%. Even with higher default contribution rates, over 93% of employees remain enrolled, showing that employees can adapt well to stronger saving starts.
- Auto-increase steadily grows contributions helping employees reach the 15% total savings target (including employer match) suggested for a secure retirement.
- Annual re-enrollment re-engages under-savers and nonparticipants, giving them a chance to start over each year.
Principal has established these plan design best practices:
- Auto-enrollment using a default contribution of 6% or higher, with
- Auto-increase of 1-2% annually up to a 15% cap, and
- Annual re-enrollment to help under-saving or nonparticipating employees
What’s next?
Helping employees retire on time supports more than just the bottom line, it helps keep career paths open, morale strong, and teams engaged. Employers who integrate automated savings features can make meaningful progress toward both goals.
The first step is reviewing current plan design with these questions in mind:
- Are automated features in place to help employees start saving early and increase contributions over time?
- Are participation and savings rates high enough to support what’s considered on-time retirement? The desired retirement age can vary by employee and industry.
By making thoughtful plan design changes today, plan sponsors can reduce the financial strain of delayed retirements—and help employees step into their next chapter with confidence.
If your plan doesn’t currently use automated features, now may be the time to take a closer look. Updating plan design can create a more supportive retirement experience for employees—and a more predictable workforce strategy for your organization. Contact your Principal representative for more information.
