May 11, 2012
--- 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 position 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 educational 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- or 40-year career.
To measure retirement readiness, Council
panelists suggest a two-pronged 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 time frame. The paper also touches on the tools with the greatest
impact on participant behavior. For 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 suggests 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 position paper, “Enhancing
Retirement Readiness: Consensus on a Course of Action,” is available at http://www.dcpicadvisors.com/positions.html.