Translating Retirement Savings into Retirement Income
The May 2019 passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act and subsequent issuance of interim final regulations by the Department of Labor set the stage for enhancing plan participants’ financial literacy by requiring defined contribution plans not only to display account balances but to translate those balances into a monthly income. And implementation of this change is happening now.
This seemingly minor change will pay big dividends for plan participants and sponsors in planning for retirement.
What if you received a job offer for $1.8 million — to be paid over 30 years? It may be difficult to assess and access the value over time. It’s this same equation that savers grapple with in translating the value of their retirement savings into a retirement income.
But we may be entering an age of clarity.
A key feature of the SECURE Act is the requirement that a lifetime income disclosure benefit statement be provided annually to defined contribution plan participants. This disclosure is intended to provide participants a projection of what they could expect to receive monthly during retirement, calculated on their savings to date. By translating the saving experience into a future income stream, participants can better gauge their retirement readiness and make changes accordingly.
Putting retirement savings in context brings the connections between participants’ current actions and more distant outcomes into sharper focus. This new insight may boost participant engagement and improve overall retirement readiness. Increased engagement could also create more demand for education, as participants seek to maximize their retirement income — and plan sponsors need to be ready to meet this demand.
A minor tactical detail with major consequences for savers
In practice, participants will see a monthly income number they can use to help determine whether or not they’re saving enough for retirement — vital context that many participants currently lack.
Retirement numbers can be so large they’re hard to grasp; therefore, incremental savings targets help savers see that they’re making meaningful progress toward their long-term savings goal. When participants receive an income projection on their statement, they’ll also see how changes in their contribution rate could change their income in retirement, rather than having to guess how what they do now may affect them decades down the road.
Participants’ responses to income estimates will affect plan sponsors, too
There’s evidence to support the positive effect adding income projections has on participant behavior: According to the National Bureau of Economic Research, when income projections are provided alongside annual account enrollment information, participants tend to increase their contribution levels. After the federal government’s Thrift Savings Plan added monthly income estimates to its statements, nearly a third of active participants made a change to their account, including 12% who increased contribution levels and 10% who changed their investment mix.i
While projections can be perilous, given market volatility and the sometimes winding journey to retirement, income inputs come from assumptions and explanations prescribed by the Department of Labor, meaning employers and service providers will not bear the burden of liability should actual benefits be less than those reflected in the disclosures.
Prepare to offer education and tools
Whether participants become confused or engaged, they’re far more likely to be eager for more education as they prepare for their retirement, armed with more information. Plan sponsors need to be ready to provide that education at whatever level of sophistication and convenience participants require — whether that means providing access to robo-advisors or other digital tools. But as the Department of Labor prepares to release further guidance on the line between education and advice, plan sponsors need to pay close attention so that they don’t unintentionally become ERISA fiduciaries by providing advice to participants.
In thinking about educational tools, plan sponsors might consider distributing a simple FAQ with a basic explanation of what income estimates do — and don’t — tell you, along with suggested next steps if participants have specific questions.
Research from Cerulli Associates finds investors’ openness to digital advice has increased as recently as 2015. Many cited digital advice as additive to an advisor’s insights, providing a more dimensional perspective. Higher-net-worth investors showed the greatest interest in digital advice, even within the historically lagging older cohorts.ii
Tools like calculators can help savers model the effect of changes in their contribution patterns or investment mix, while dashboards offer access to a range of digital resources.
Retirement readiness means more predictability for employers
Including income estimates on retirement statements is good for participants, which means it’s good for plan sponsors, too. Participants who know their projected monthly income are likely to feel greater confidence about the timing of their retirement, which is good news for employers who are thinking about workforce management. Employees who are better able to plan for their retirement are more likely to retire on time — providing predictability that helps employers manage their workforces more intelligently.
It’s a little surprising to think about how much positive change can come out of the addition of a single calculation on a retirement statement. But context is key, and retirement savings can be difficult for savers to digest. Adding income estimates to statements has the potential to drive engagement among participants, improving their ability to save efficiently and appropriately for retirement. The change could also be a boon for those plan sponsors ready to hit the ground running with education and digital tools for plan participants.
iGoda, Gopi Shah. “What Will My Account Really Be Worth? An Experiment on Exponential Growth Bias and Retirement Saving.” The National Bureau of Economic Research, March 2012.
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