The legions of Baby Boomers approaching retirement is turning up the heat on the issue of ongoing income, especially to pay health care expenses in retirement, according to Cerulli Research.
The July 2015 Cerulli Edge-Retirement Edition takes a look at how recordkeepers and plan sponsors can change plan participants’ perspectives, helping to de-emphasize investment return and think about potential income.
Most plan participants lack the translation of current balance to future retirement income, contends Cerulli in its report, which recommends that this information be included on statements from plan recordkeepers.
What do plan participants believe is the most important information on their retirement plan statements? It’s not income—according to Cerulli’s data, a majority of participants (80%) say it’s their accumulated balance or investment performance.
Those in the 60 to 69 age range may appear to pay the most attention to income projections on a statement, but this is not the case, with only 19% of people in this age group concerned about income, Cerulli says. Forty-six percent of people in this age group say they are most interested in the investment performance shown on the statement. Participants consistently consider a defined contribution plan through the lens of accumulation and forget that their savings are meant to play a key role in a drawdown schedule in the retirement years.
Cerulli says that getting participants to see the balance as a stream of monthly payments—an actual retirement pension—will help them to grasp what the savings actually means, and not just view it the way they would a typical brokerage account. When that mindshift takes place, participant attitudes toward these funds will also change.
Citing the Department of Labor’s (DOL) consideration of a rule to make income projections mandatory, Cerulli recommends including the information as a best practice for all recordkeepers. Relatively conservative assumptions or the DOL’s recommendations should be the yardstick, Cerulli says. It’s also possible that the inclusion of income projections could spark conversations with those participants who want to delve more deeply into the meaning of the projection, and how any outside assets might come into play.
NEXT: How to get participants more rooted in reality.
A number of factors must be taken into consideration, such as the metrics that indicate success in the minds of many plan participants. Investment performance remains the top indication of success, Cerulli says, which potentially creates unrealistic expectations for market performance and can lead participants to allocate in a too-risky manner.
Here, recordkeepers can be of assistance, by helping to monitor investment choices and proactively contacting participants who have misallocated accounts.
However, participants should not be steered into too-frequent rebalancing, which could actually inhibit long-term savings. Among the dangers are having to pay short-term trading fees and changing allocations to more expensive funds. Cerulli suggests monitoring these participants closely and stressing to them the importance of sticking to a plan.
Most participants remain uncertain about investment selection, according to The Cerulli Edge, which found that higher incomes bring an increased percentage of participants who seek reassurance about their retirement investments: 37% of participants who have $100,000 to $250,000 saying they conduct their own research, but want reassurance they are on the right path, compared with 27% of participants with $50,000 to $99,000 expressing the need for some guidance.
Lower incomes correlate with a desire for simpler investment strategies and fewer choices, with 14% of participants preferring a single investment they don't have to think, compared with 6% of participants who have $100,000 to $250,000 saying they prefer a single investment.
The report also found that younger participants under age 30 have unrealistic expectations about the proper amount to save for retirement:
- Greater than 6% but less than 10%, say 33% of participants under 30;
- Between 3% and 6%, say 28%; and
- 10% or greater, say 26%.
Changing the average saver’s mindset is a key goal, the report concludes, since health accumulations and high investment returns are positive, the balance must match projected retirement expenses to avoid a shortfall, Cerulli says.
More on The Cerulli Edge-Retirement Edition 2Q 2015, including purchase information, is on the Cerulli website.
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