Millions of Americans depend on employer-sponsored, defined contribution retirement plans to help safeguard their financial futures. These plans have come under attack from several quarters in recent years. While some aspects of these criticisms make important points, it is extremely important that those criticisms do not undermine and discourage the use of proven retirement savings vehicles.
The most important outcome of any retirement saving plan is also one of the most frequently overlooked: ensuring retirees have enough income to see them through the rest of their lives. Solving that challenge is particularly timely, as experts agree that America is facing an imminent retirement crisis. The fact is that too many people in their working and saving years measure their success in terms of asset accumulation. This is understandable. Seeing retirement account balances grow larger provides a sense of accomplishment and boosts savers' confidence there will be plenty of resources to draw upon when they retire.
Yet asset accumulation shouldn't be the end goal of retirement planning. A huge account balance on the day a worker retires will mean little if the worker outlives it. An effective retirement plan should provide options that allow workers to build savings, adjust their mix of risk and safety as they age, and turn their accumulated savings into lifelong income in retirement.
And as Americans live longer, the need for guaranteed retirement income is becoming more pronounced. According to the National Center for Health Statistics, between 1980 and 2013, the average life expectancy of a 65-year-old increased to 19.3 years from 16.4. According to TIAA's 2015 Lifetime Income Survey, 84% of Americans believe that having a guaranteed stream of income for the rest of their life is important, but 62% have not considered how their savings will translate into monthly income in retirement. There is a disconnect between what Americans want vs. where they actually stand with their retirement savings.
Plan sponsors can help participants meet their lifelong income needs by considering three primary factors when putting together a retirement plan.
First, be sure the plan has an appropriate mix of options. A plan should have enough choices that savers have access to a variety of investment strategies at various levels of risk and safety. It's also wise to include a default investment option to assist employees who aren't proactive in making retirement planning decisions.
Second, consider fees and other costs in context. The more expensive plan options are, the harder it is to build savings, so fees and costs should be minimized. That doesn't mean, however, that the lowest-fee option is always the best one. The real cost of a particular fund or investment should be measured in relation to the value to the plan and participants, including the guaranteed income it can provide.
A guaranteed fixed annuity might come with higher fees than managed portfolios of stocks and bonds, variable annuities or mutual funds, but it is important to recognize when comparing fixed annuities to other types of investments that it is not a simple apples-to-apples comparison. One of the most common misrepresentations regarding fixed annuities is comparing charges for prematurely liquidating guaranteed income annuities with fees associated with traditional assets classes.
Third, plan design and advice are important. A retirement plan can only be effective if employees participate in it. Plan sponsors can provide an incentive for employees by offering matching employer contributions, having plan design features that fight inertia such as auto enrollment, and providing financial advice and planning tools to help employees plan for their long-term financial security.
Customized financial advice must be delivered where, when and how employees want to receive it. It must address each employee's individual needs and focus on the outcomes that matter to them. According to TIAA's 2015 Advice Matters Survey, those who have discussed retirement with an adviser are much more likely to calculate how much income they'll need in retirement — 79% vs. only 32% who have not met with an adviser. The value of advice is clear, and employers should do whatever it takes to make sure their employees are getting it.
How can plan sponsors be sure their plan is adequately focused on retirement outcomes? One rule of thumb is to calculate participants' income replacement ratios, showing the percentage of pre-retirement income employees are on track to replace in retirement. The generally accepted standard is that plan participants will need between 70% and 100% of their pre-retirement income to enjoy a secure retirement. (Participants on the lower end of the salary spectrum might need more.) Knowing the plan's income replacement ratio (combined with estimated benefits paid by Social Security) will help plan executives identify whether employees are on target to meet their retirement goals or might need additional support.
If employees aren't on track to receive sufficient retirement income, employers should focus on getting their workers the advice they need. And providing access to an in-plan fixed annuity that turns savings into guaranteed retirement income can help meet some of their income replacement goals. Employers should never stop comparing retirement plan offerings to other plans of a similar size, region or industry group. If those offerings are falling short in competitiveness, compliance or cost-effectiveness, employers should consider making changes that will give employees the best opportunity to achieve financial security.
The best measure of success for any employer-sponsored retirement plan is whether employees can live securely in retirement. By giving employees the ability to save adequately and generate retirement income they can't outlive, employers can meet their responsibilities to employees all the way through retirement. And don't American workers deserve a dignified retirement after a 30- or 40-year career?
For those of us who view ourselves as custodians for the future of hardworking men and women, we know our mission is larger than ourselves, and we work hard to maintain and build upon the trust that we have established over generations.
