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 (DC) 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 advice, 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.1
While projections can be perilous, given market volatility and the sometimes-winding journey to retirement, income inputs come from Department of Labor-prescribed assumptions and explanations, meaning employers and service providers will not bear the burden of liability should actual benefits be less than those reflected in the disclosures.