By: Alison Salka, Ph.D., corporate vice president and director, LIMRA Retirement Research
Earlier this month, the Department of Labor’s Employee Benefits Security Administration (EBSA) announced it is considering requiring defined contribution plan providers to show participants both their total account balance and the estimated lifetime income stream that they would receive beginning at retirement.
We believe that this information could have a positive impact on retirement planning and saving. LIMRA’s retirement research shows that the majority of pre-retirees (age 55-70, non-retired) have not done some of the basic retirement planning to determine how much income they would have in retirement (chart). Presenting plan balances as an income stream highlights the fact that retirement balances are designed to provide income over time in retirement. If participants start thinking in terms of income, they may start thinking about things they need to do to generate income and plan for retirement.
Many plan participants currently focus on the amount they have saved, not the income they can generate. Account balances that seem high may in fact not generate adequate income. The average plan balance for pre-retirees is about $82,000. Even for those who have a quarter of a million dollars, an amount that seems reasonably large, the maximum possible income guaranteed for life would be only $17,800 per year for a man retiring at age 66.
Earlier education of how their assets will convert into lifetime income may prompt all workers to increase their savings rate in an effort to improve their retirement prospects. Our research shows that participants don’t spend a lot of time on their statements (67 percent spend five minutes or less). Providing information on how their assets translate into an estimated lifetime income stream next to their account balance is one reliable way to get their attention – because we know the majority of participants do check their balances.
LIMRA retirement research indicates that most consumers do not understand how much income they will receive based on their total DC plan balance or how long that income will last. Retirement plan providers can further help DC participants by providing benchmarks to help participants monitor their progress and gap statement to help them better understand where they should be and what they need to save to get there.
LIMRA believes that understanding how their DC assets will translate into a lifetime income stream is important component for Americans who are planning their retirement. If implemented, this proposal will provide more relevant information to people as they consider their day-to-day lives in retirement.
As director of LIMRA’s retirement research program, Alison Salka supervises and conducts consumer research, benchmark studies and white papers focused on helping member companies better understand issues and trends in the retirement market. Prior to joining LIMRA in 2012, Salka led the retirement research and competitive intelligence team at Prudential. She was also Director of retirement research and analytics at MassMutual. She is a graduate of Gettysburg College and received an MA from the College of William and Mary and a Ph.D. from Vanderbilt University.