The Bottom Line | Published in November 2012

Future Shock

Income replacement figures will help participants prepare for retirement

By Corie Russell | November 2012
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Ping Zhu

Imagine being a 35-year-old employee trying to pay for your house, car and family while still saving for retirement. You think you are on the right track with your 401(k) contributions—you invest enough to receive the full company match and have already saved close to a year’s worth of income in your plan—until you receive a statement that projects the enormous amount you will need to have saved before you retire in a few short decades.

Estimates of the total savings needed to fund a secure retirement can be discouraging for participants, which is why some recordkeepers are listing yearly or even monthly retirement income projections on participants’ 401(k) statements. “The big-number syndrome … [is] a little scary to participants,” says Joseph Frustaglio, vice president of sales for Nationwide Financial in Columbus, Ohio.

Participants in 401(k) plans prefer more proactive steps to increase their retirement readiness rather than historical transactions on their account statements, according to the fourth annual “2012 DC Participant Experience Study” by KK & Company and Greenwald & Associates. The study found that most participants were extremely or very interested in having their statements include estimates of how much they need and projections of how much they would have in their plan at retirement age if they continued to make contributions. Three approaches to these calculations were tested in the survey, but the most preferred was based on a continuation of contribution rates.

Donn Hess, managing director at J.P. Morgan Retirement Plan Services in Overland Park, Kansas, says his company tested several options but found it was best to present projected income as a value adjusted for inflation and in terms of an annual salary, since many participants have no monthly budget and are more accustomed to an annual figure.

For other companies, a monthly income projection makes more sense. “[A monthly figure is] a number participants can more readily relate to,” says Charlie Nelson, president of Great-West Retirement Services, a division of Great-West Financial, in Denver.

Great-West is including income projections on participants’ fourth-quarter statements this year, Nelson says. Participants’ statements will include a monthly projected retirement income based on the individual current account balance, historical contributions to their retirement account and some standardized variables and assumptions.

Nationwide’s Frustaglio agrees. “We do think it’s important that people have this in a monthly-income format,” he says. “People can relate better to a monthly budget than they can a big [lump-sum] number that might seem hard to obtain down the road.”

Although Nationwide does not list income projections on its 401(k) statements, participants can use its online On Your Side Interactive Retirement Planner tool, which generates monthly and annual income projections based on user inputs and then displays retirement income gaps.