May 11, 2012 (PLANSPONSOR.com) - Target income replacement ratios should be higher than the 70% to 75% conventionally accepted as a rule of thumb, the Retirement Advisor Council contends.
In a paper, the Council says the higher ratio is to account for the projected cost of health care in retirement, and traditional financial planning concerns such as personal health, children's education needs and the cost of caring for elderly relatives. Regardless of target income ratio, the paper calls for consistent contribution levels to 401(k) and 403(b) plans in the range of 10% to 16% of pay over a 30-year or 40-year career.
To measure retirement readiness, Council panelists suggest a two-prong approach: one measure based on income replacement ratios for younger participants with a decades-long horizon to retirement, and a different set of measures for those with limited savings and a shorter timeframe. The paper also touches on the type of tools most impactful on participant behavior. When it comes to automatic enrollment, the six panelists advocate for a default deferral election in the range of 6% to 10% that far exceeds the 2% to 3% many employers adopt out of fear of disruption, which experience suggest is unfounded.
“Intuitively, when we’re working with an employer going from a DB-centric to DC-only, the percentage we’re starting at in recommendations of 6% to 8% for everybody. The goal is to be at 10% average deferrals in two to three years,” said Council member Jim Robison, principal of White Oak Advisors.
The paper is based on the transcript of a discussion among Council members Robison; Phil Callahan, managing director at Goldman Sachs Asset Management; Gene Huxhold, senior managing director at John Hancock Mutual Funds; Peggy Santhouse, vice president at Diversified; and Jon Shuman, vice president at MassMutual. The discussion was moderated by Steve Davis, regional vice president at The Hartford.
The full paper titled “Enhancing Retirement Readiness: Consensus on a Course of Action” is available at http://www.dcpicadvisors.com/positions.html.