Lifetime income estimates: Your opportunity to rethink employee retirement readiness
The SECURE Act’s provision requiring 401(k) and other defined contribution retirement plans to provide participants with lifetime income estimates has received much attention in the world of plan sponsors as they work with recordkeepers to comply.?
But from where I sit, lifetime income estimates are a huge opportunity for employers and employees to revisit retirement readiness. Here’s how.
Anticipate employee disappointment and questions. Seeing their lifetime income estimates is likely to lessen retirement confidence for a good portion of employees. Younger employees may be shocked by their lifetime income projections and what that means for their retirement planning, but perhaps even more critical are those nearing retirement who may be caught off guard, suddenly realizing that they’re not where they had hoped to be financially at this stage in their careers.
In fact, our 2021 Employee Financial Wellness Survey examined the financial habits of full-time employees in the U.S. across a variety of industries and found that among Baby Boomers and Gen X employees who plan to retire within the next five years, one-third have never examined whether they’re on track to meet retirement goals. Perhaps even more distressing, more than half (51%) have saved less than $100,000 for retirement. Based on basic retirement planning guidelines, an employee retiring with $100,000 would only be on track to withdraw $4,000 annually based on living 30 years in retirement.* It’s clearly not enough.
From my experience coaching employees, I hear them ask:
Your employees need help, and you can provide assistance.
Position resources to help employees take action. You may have some of the pieces in place already like retirement modeling tools available through your retirement plan provider which allows employees to see the potential impact of saving more each pay period. Promote those tools alongside the lifetime income estimates.
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Other benefits may need to be added like financial coaching to help employees evaluate budgeting and saving strategies and address underlying cash and debt issues that may be the root cause of retirement savings insufficiency. Getting employees into your retirement plan and saving more in the plan isn’t enough. We find that 43% of Baby Boomer and Gen X employees who plan to retire within the next five years think it’s likely they’ll need to use money held in retirement plans to pay for expenses other than retirement. Why? To deal with unexpected expenses (48%), to pay medical bills (24%), and to pay off credit cards (15%).?
Here in the employee financial wellness practice that I lead at PwC, we coach thousands of employees each year who are experiencing these challenges. They often lack confidence in their ability to manage personal finances. No one ever taught them how. Access to objective financial education and guidance levels the playing field and helps people break down complex issues into manageable action steps that lead to true progress like paying off debts, restructuring spending plans, and being accountable to goals.?
Consider plan design. In the past, plan design was touted as a solution to address low savings rates and plan leakage. But while plan features such as auto enrollment and auto escalation increased contributions, and tightening loan and withdrawal provisions reduced the extent to which employees could raid their retirement plans, these changes did little to ameliorate underlying cash and debt issues, leading some to seek out costly payday loans or payday advances. As lifetime income estimates call greater attention to employees’ lack of retirement readiness, the pressure is on employers to enhance retirement security. Some may consider offering annuity options in their DC plans. Employees who have this option often need financial coaching to help them decide between lump sum vs. annuity distributions. That’s something we’re discussing with employers who are reevaluating plan design, assessing the feasibility, cost, and risk to their plan, and addressing how plan changes align with their workforce strategy.?
Time will tell the impact that these illustrations of monthly income will have on today’s workforce. From my perspective, it could be the push organizations need to rethink plan design and offer benefits that truly advance employee retirement readiness.
*Assumes $100,000 at retirement, an overall 8% rate of return, 4% yearly drawdown in retirement, for 30 years.