Over the past several years, a growing amount of attention has been focused on the decumulation of defined contribution plan balances. Much of that focus has, of course, been driven by concerns that individuals won’t have enough resources accumulated to fund a comfortable retirement. More recently, there has been a sense that one way to help provide a different perspective on these retirement savings would be to provide participants with an estimate of what their current or projected savings would produce in terms of a retirement income stream.
Retirement plan advisors will recall that in May 2013, the U.S. Department of Labor's Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, a participant's pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance.
As noted in a recent EBRI Notes article, there appears to be little empirical evidence on the likely impact of such a lifetime income illustration on DC plan participant behavior. Consequently, and in an attempt to provide some additional evidence with respect to DC participants’ potential reaction to lifetime income illustrations similar to those proposed by EBSA, EBRI included a series of questions in the 2014 Retirement Confidence Survey regarding responses to monthly income illustrations similar in many respects to those provided by the EBSA’s online Lifetime Income Calculator.[1. Of course, any such projection is necessarily required to make a number of critical assumptions — including future contribution activity, future rates of return, future asset allocation and future annuity purchase prices. Moreover, the estimates we provided were different in several aspects, notably:
• Rather than using normal retirement age for the calculation, we asked their expected retirement age.
• Since the age of the spouse was not known for married respondents, only the single life annuity income illustration was used.
• Given that the information was being provided to the respondent during a phone interview, only the projected monthly income (based on the projected account balance given the respondents’ reporting of their current balances) was provided.]
What we found was that fewer than 1 in 10 (8%) of the DC plan participants said the monthly amount was much less than expected, though another 1 in 5 (19%) said it was somewhat less than expected.[2. There were some interesting differences by income level; combining the “much less” and “somewhat less” categories, we found that 42% of those in the lowest quartile for illustrated monthly income indicated that the value was less than expected, versus only 9% of the highest quartile.] However, more than half (58%) thought that the illustrated monthly income was in line with their expectations.
They may not have been much surprised by the results, but the vast majority of respondents said the retirement income projection was useful; more than 1 in 3 (36%) respondents thought that 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. Moreover, that favorable impression held regardless of the outcome’s alignment with expectations; 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. Even among those who felt the values were higher than expected, 79% found the estimates somewhat or very useful.
I’ve heard from several industry experts and advisors since the results were released who were surprised that the survey respondents weren’t surprised. It is, of course, possible (as the article explains) that these respondents’ current participation in employment-based plans has already provided them the education and information necessary for an appreciation both of the projected total and the monthly income estimate, and thus a greater alignment of those projections with their expectations. It could also be that, having given some thought to the subject of savings and retirement over the course of the interview, they had more realistic expectations.
Of course, whether individuals are able to live on those expected amounts in retirement remains to be seen.
Footnotes
