Not-for-profit sector retirement plan participants are estimated to replace an average of more than 90% of their pre-retirement income in retirement, according to research from TIAA-CREF’s new Retirement Income Index.
TIAA-CREF retirement plan participants’ average plan account balance is approximately $177,000 (as of December 31, 2014), nearly twice the industry average of $91,300 (as of December 31, 2014). However, an important financial retirement readiness measure is income replacement, as this is the metric that determines whether individuals will be able to meet their essential living expenses.
“Historically, the industry has measured the success of retirement plans based on inputs, such as participation rate and employee contribution rate, but we haven’t measured results. Plan sponsors believe the objective of their retirement plan is to deliver income in retirement, and that’s what we set out to solve for—income replacement rate at retirement,” Ed Moslander, senior managing director and head of institutional client services at TIAA-CREF in New York, tells PLANADVISER.
According to findings of the Retirement Income Index, employees generally can expect to receive more than 90% of their pre-retirement income in retirement, with 53% of that coming from guaranteed sources such as Social Security (47%) and fixed annuities (6%), and the balance from variable sources such as mutual funds and variable annuities.
Participants age 67 or older have an average income replacement ratio of 107%. TIAA-CREF says this is driven by higher average savings rates and account balances, but also reflects less reliance on Social Security for guaranteed lifetime income.
The Retirement Income Index is based on a study of 500,000 employees actively contributing to TIAA-CREF retirement plans as of December 31, 2014. The data is derived from TIAA-CREF’s Plan Outcome Assessment (POA), a consultative service that enables plan sponsors to analyze and evaluate their plan’s goals, design and investment choices, as well as employee demographics and behaviors.NEXT: Best-practice plan designs
“The findings of the Retirement Income Index are a great testament to our clients’ use of best-practice plan design and investment solutions, coupled with our focus on lifetime income,” says Teresa Hassara, president of Institutional Retirement at TIAA-CREF.
Moslander explains that TIAA-CREF defines best-practice plan design as a combination of employer and employee contribution that are a minimum of 10% of a participant’s income (the average among TIAA-CREF participants is 14%; having an appropriate asset allocation mix available for participants to invest in, which includes in-plan annuities; and delivery of personalized advice. He adds that the not-for-profit market has been doing these things for a long time. Many never had a defined benefit (DB) retirement plan, so they treated their defined contribution (DC) plans as pensions, ensuring the adequacy of contributions, investments and advice.
The Retirement Income Index found participants younger than age 40 have an average income replacement ratio of 110%. However, this could change as these participants are generally saving less than their older counterparts, and the projections show they are more reliant on Social Security than on their own investments for their guaranteed income.
Moslander says automatic enrollment and automatic deferral escalation can mitigate risks for those younger than age 40. In addition, a fun challenge for plan sponsors is to communicate the importance of savings and the fragility of Social Security in a fun way to employees and in a way they want to get the information, such as online or mobile and using gamification.
For years, TIAA-CREF has included income projections on participants’ quarterly statements to help them think about their DC plan as a pension, according to Moslander. “For both sponsors and participants, the objective of the plan is income replacement, and that is mindset we are striving to create. Our index helps give this message to all,” he concludes.
More information about the Retirement Income Index is here.