Making Retirement Income Projections Useful

Plan participants need advisers to go beyond just awareness of their balance to thinking about that balance in the form of retirement income or an income stream.

Art by Scott Bakal

As the retirement industry increasingly focuses on helping plan participants not only with the accumulation of plan assets but with decumulation as well, there’s been deeper emphasis on the importance of making income projections as useful—and accurate—as possible.

“For the past 40 years, since ERISA, we have been telling people ‘Here’s what you need to do, how to think about saving, here’s an employer match’ but we never told them what their number should be,” says Sri Reddy, senior vice president, retirement income and solutions at Principal. “And that number varies by person. We don’t know what their lifestyles are and what their expenses are.”

Many recordkeepers have been offering retirement income projection in some form for years, and the Setting Every Community Up for Retirement  Act of 2019 created a new requirement that the Department of Labor mandate and standardize the provision of recurring lifetime income projections for individual participants on an annual basis.

That’s a positive step forward for the industry, says David Stinnett, principal, and head of Vanguard Strategic Retirement Consulting Group.

“It’s a very helpful evolution for participants to go beyond just awareness of their balance to thinking about that balance in the form of retirement income or an income stream,” he explains. “Because many people see the balance and the next logical question is ‘Is this good? Is it enough? Will it last?’”

Reaching the unengaged

Participants who hadn’t previously seen retirement income illustrations within their website account should have at the latest received the data with their third-quarter statement. Just because such illustrations are available, however, does not mean that participants are seeing them. Reddy points out that many participants don’t regularly check their 401(k) statements—and they’re even less likely to do so when markets are down as they currently are.

“There’s a self-selection bias in our industry, and the people who are predisposed to use these tools are the ones who are already more engaged in their finances and they’re already doing OK,” says Nathan Voris, director, investments, insights and consultant services for Schwab Retirement Plan Services.. “We need to think about how to reach those folks that aren’t engaged.”

Voris says that advisers can add value there, by creating content and other connection opportunities to reach those participants. For the unengaged, simply looking at the retirement income projections and starting to think about their progress toward retirement could be a major step and enough to spur them to engage further with the plan.

“We have to make sure we’re delivering simple advice for folks who have a simple scenario,” Voris says.

Of course, for those with a more complicated financial picture, retirement income projections are only useful if recordkeepers can capture a participant’s assets from different sources—a system which some recordkeepers have in place now. However, even the most robust digital tools require engagement from the participant to log in and input information about their external assets such as IRAs, pensions or 401(k)s from a former employer; Social Security projections; spousal assets; debt; age of planned retirement; and other factors.

More education needed

In addition to understanding how their current 401(k) balance fits into their broader financial picture, participants need assistance in creating a plan for how to efficiently tap into those and other funds that they have available.

“If you don’t provide education around how to think about longevity and drawing down their income, participants over assume how much they can take out,” Reddy says.

At a minimum, advisers should be working with sponsors to make sure that dynamic lifetime income calculators and tools are front and center on the participant platform for those who want to go deeper than the static number they find in their account statement, says Stinnett.

“When people are logging on, they shouldn’t have to hunt around for it,” he adds. “And there should be an effort into encouraging plan participants to log in and engage with that tool.”

There is also an opportunity for advisers, who can assist participants gather the relevant information and help them make sense of the income projections that the data creates.

“As a company, we are trying to use those digital tools to do this type of planning at scale, but there has to be a human interaction, encouraging participation in that process,” says Andrew Jefferys, senior vice president at OneDigital Financial Services. “For the 55-and-over crowd, they need full financial planning with a licensed and accredited counselor helping along the way.”

A personalized approach

Understanding retirement income projections is only one step in the process of planning for decumulation. Workers need to be able to put that figure into context based on their retirement income needs, but only 30% of workers have created a retirement savings goal based on their estimated expenses in retirement, and 21% don’t have a retirement savings goal at all, according to Principal data. More than a third of workers list ‘lack of retirement income planning’ as one reason they don’t feel they’ll be financially comfortable in retirement.

While advisers can help sponsors deliver financial wellness tools that address these issues at a high level, many individuals need more customized support to make sense of retirement income projections.

“Historically, especially in large plans, some advisers have shied away from engaging the participants on one-on-one levels,” Jefferys says. “But I think that’s the way of the future. As much scale as the world tries to achieve from profit margins and costs, ultimately. we should be encouraging sponsors to be advocates for financial advisers coming in to help participants in the workplace or at home.”