Participants Seek Income Guarantees

Plan participants are seeking a financially secure retirement, with more than one-third (34%) seeing the generation of guaranteed monthly income as the main goal of their retirement plan.

A survey from TIAA-CREF reveals another 40% of participants want to ensure their savings are safe regardless of what happens in the financial markets. Yet 72% either do not have a retirement income option in their defined contribution retirement plan or are unaware if their retirement plan has one.

In terms of potentially running out of money in retirement, 20% of participants are somewhat concerned and 24% are very concerned. But, just 21% expect to receive income from annuities.

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Fifty-three percent of participants plan to use savings withdrawals as one of their sources of monthly retirement income. Yet TIAA-CREF research shows if retirees make withdrawals from their retirement savings that are equal to the income payments they would receive from a lifetime annuity (assuming the same interest rate), there is a greater than 50% chance they will outlive their savings. Annuity payments, however, would continue for as long as the retiree lives.

“All workers deserve a secure retirement, but many need help in setting realistic plans to achieve that goal,” explains Teresa Hassara, executive vice president of TIAA-CREF’s Institutional Business. “With life expectancies increasing rapidly, lifetime income options are essential to sustaining financial well-being over a retirement that could last for 30 or 40 years. Plan sponsors play a key role in educating employees on the value of these options.”

Most experts agree Americans will need 70% to 90% of their pre-retirement income to maintain their standard of living in retirement, according to the New York-based Hassara. Yet one-third (33%) of surveyed participants who have not yet retired believe they will need only 25% to 50% of pre-retirement income, and another 33% believe they will need 50% to 75%. Only one-fifth (21%) of those surveyed believe they will need more than 75% of pre-retirement income to live comfortably in retirement.

Experts also recommend saving at least 10% to 15% of income for retirement annually, TIAA-CREF says. However, the survey found 44% of those who have not yet retired are saving 10% or less of their annual income. Another 21% are not saving for retirement at all.

“The survey shows that most Americans underestimate the amount of retirement income they will need,” adds Hassara. “But a bigger concern is that more than one-fifth of Americans are not saving at all for retirement, and many more are not saving enough.”

“These findings seem to affirm what we’ve heard anecdotally—that there is a disconnect between what participants say they want and what they actually do regarding retirement,” Tim Walsh, managing director of Investment Services tells PLANADVISER. “It also reveals the lack of focus on what the true objective of a retirement plan is. When plan sponsors are asked whether the goal is to maximum wealth or provide participants with monthly retirement income, many are hard pressed to answer.”

Walsh, who is based in Waltham, Massachusetts, observes that despite the popularity of defined contribution plans as a retirement vehicle, the survey results with regard to lifetime income products seems to signal a nostalgia for the kind of retirement benefits produced by defined benefit pensions. 

Walsh recommends plan sponsors use plan management and plan design to help participants. He notes that inclusion of lifetime income projections on quarterly participant statements, as well as the use automatic plan features, can be quite helpful in this respect.

KRC Research conducted the survey by phone among a national random sample of 1,017 adults, ages 18 and older, between January 3 and 5. An executive summary discussing the survey results can be downloaded here. A related report can be downloaded here.

Americans Like DC Arrangements

Americans tend to view defined contribution (DC) retirement accounts favorably, and they like the way DC contributions and withdrawals are taxed, research shows.

Nearly two-thirds of U.S. households view defined contribution retirement accounts favorably, according to results from a recent survey published by the Investment Company Institute (ICI). Along with strong favorability marks, U.S. households also expressed support for the key features of DC plans—results that are consistent with previous years’ findings.

“Our survey found strongly positive views of U.S. households toward the DC plan system, even in cases in which no one in the household was invested in a retirement plan,” says Sarah Holden, senior director of retirement and investor research for ICI. 

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ICI’s report, “Americans’ Views on Defined Contribution Plan Saving,” is based on survey results from respondents in November and December 2013 about their views on DC retirement account saving and their confidence in 401(k) and other DC plan accounts.

Survey results show that a strong majority (90%) of account-owning households appreciate the payroll deduction features of qualified DC arrangements. Nine in 10 account-owning households also like having control of investment choices within a DC plan; the same number agreed that these plans help them to think about the long term.

The survey also revealed substantial support for the current tax treatment of retirement plans. A strong majority of U.S. households—including those with and those without retirement plan accounts—disagree with the notion of changing the current tax treatment of DC accounts to remove or reduce tax incentives for retirement savings. The survey found:

  • Eighty-six percent of households disagreed that the government should take away the tax advantages of DC accounts, and 83% disagreed with reducing the amount that individuals can contribute to DC accounts.
  • Among households not owning DC accounts or individual retirement accounts (IRAs), 81% rejected the idea of taking away the tax treatment of DC accounts.
  • Eighty-six percent of households overall disagreed with a proposal that individuals not be allowed to make investment decisions in their DC accounts, and more than eight in 10 disagreed with replacing all retirement accounts with a government bond. 

U.S. households generally, whether they owned a retirement account or not, also expressed confidence in DC plans’ ability to help individuals meet their retirement goals. More than eight in 10 households owning DC accounts or IRAs indicated such confidence. This measure of confidence was only slightly less evident—nearly two-thirds of households—among households without a DC account or IRA.

More on the ICI survey results is available here.

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