“We have all been saying, ‘Just wait until participants see this on their statement; jaws will drop, it will be a wake-up call.’ You know the DOL thought that,” says Nevin Adams, director of education and external relations at the Employee Benefit Research Institute (EBRI). “While some providers have already started providing this information and seeing some positive results in the form of increased savings, I’ve seen no survey showing what participants think.”
Until now, that is. As part of EBRI’s 2014 Retirement Confidence Survey (RCS) (see “Retirement Plan Offering Strongly Linked to Confidence”), participants were asked how much money they currently have saved in their employer-sponsored plan in total, how much money in total they and their employers currently contribute to the plan annually, and their expected retirement age. Using the data given by respondents, the monthly income available at their stated retirement age was estimated based on the methodology described in the DOL’s Advanced Notice of Proposed Rulemaking (ANPRM) about lifetime illustrations (see “DOL Seeks Comments About Lifetime Income Data”), using the safe harbor assumptions and a few modifications. More than half (58%) thought the amount calculated was about what they had expected.
According to the report “How Would Defined Contribution Participants React to Lifetime Income Illustrations? Evidence from the 2014 Retirement Confidence Survey,” authored by Jack VanDerhei, EBRI research director, only 8% of the respondents indicated the monthly amount was much less than expected, though nearly one in five (19%) replied that it was somewhat less than expected. Another 7% replied that it was somewhat more than expected, and 5% said it was much more than expected.
A total of 81% of the respondents indicated they would continue to contribute at their current rates after hearing the projected monthly income amount, while 17% replied that this information would lead them to increase the amount they were contributing.
So, does the lack of surprise by participants mean the retirement “crisis” is not as bad as we think? Are participants more prepared than media reports and other surveys suggest?
“I admit when I first ran the numbers I was surprised that’s how many that said that’s what they were expecting, and such a small number said they would change their contributions,” VanDerhei tells PLANADVISER. “But, keep in mind some folks’ providers are already providing projections; that might go a long way to explaining that 58%.”
“The fact that it’s what was expected doesn’t mean it’s enough,” Adams adds, noting that the survey only gauged participant reaction to the projection, not that the projection calculated is enough to live on in retirement. He notes that the survey found people with retirement plan accounts were less surprised than people without retirement plan accounts.
In addition, the survey found while 18% of those in the lowest-income quartile, when ranked by the value of illustrated monthly income, thought the value was much less than expected, only 12% of those in the second quartile had a similar assessment. The weighted percentage of respondents that thought the illustrated values were much lower than expected were even smaller for those with larger monthly illustrations, at 3% for those in the third quartile and 1% for those in the highest-income quartile.
While 13% of those with household incomes of less than $60,000 thought the value was much less than expected, 10% of those with household incomes between $60,000 and $99,999 had a similar assessment. The weighted percentage of respondents that thought the illustrated value was much lower than expected was only 4% for those with household incomes of $100,000 or more.
Eleven percent of the respondents indicating they expect to retire at or before the median age of 65 thought the value was much less than expected, while only 6% of those expecting to retire after age 65 had a similar assessment.
There are still things not known about the participants overall situation, “but this is a good national sampling with consistent calculations based on the numbers participants provided,” Adams notes.
Ultimately, the question is, will lifetime income illustrations spur positive retirement savings behaviors? This is a stated hope of the DOL (see “Income Projections: Showing Participants a Better Way”).
Adams notes that it makes sense since most were not surprised by the estimate, most would not change anything, but a greater proportion of those who were surprised by the calculation said they will change their savings. Of those responding that their illustrated value was much less or somewhat less than expected, 35% indicated they would increase their contributions. Of those indicating they would increase contributions, 69% thought they would increase the dollar amount by 10%, while another 13% said they would increase it by about 25%. Three percent indicated they would increase it by 50%, while another 8% thought they would double it. Seven percent did not know how much they would increase their contributions.
In addition, the vast majority of respondents said the retirement income projection was useful; more than one in three respondents (36%) thought it was very useful to hear an estimate of the monthly retirement income they might expect from their plan, and another 49% thought it was somewhat useful. Only 5% thought it was not too useful, and 10% thought it was not useful at all.
A total of 90% of those whose illustrated values were lower than expected found the estimates somewhat or very useful, and nearly as many (86%) of those whose values were equal to what they expected also found the estimates somewhat or very useful. A somewhat lower proportion (79%) of those with illustrated values higher than expected found the estimates somewhat or very useful.
“The RCS shows lifetime income illustrations will serve as a wake-up call to some participants and will spur positive action, so they’ll serve the purpose of the DOL intentions. Even people who said they were not surprised by the estimate still find it useful, so why not give participants this additional perspective?” Adams concludes.
“How Would Defined Contribution Participants React to Lifetime Income Illustrations? Evidence from the 2014 Retirement Confidence Survey” is in the March edition of the EBRI Notes at www.ebri.org.