Planning for retirement has historically been focused on saving as much as possible. But if the actual target is to secure income for life, we think giving participants a preview of the future income they’re building can encourage even better savings habits now.
Saving for retirement is a long-standing goal of American workers, but the focus of defined contribution (DC) plan participants is increasingly shifting from how much they can save to how much income they can secure. Encouraging participation and offering matches and sound investment options is a solid foundation, but plan sponsors should also bring retirement income to life for participants.
Visualizing Future Income Now Can Help Avoid Shortfalls Later
Retirement goals can seem distant, so many participants need assurances that they’re on the right path to retire on their own terms…without worry. And translating participants’ current savings into expected retirement income down the road makes it more tangible and relevant.
Besides encouraging better savings behavior, retirement-income visualizations can help participants avoid potential shortfalls, particularly if an ill-timed market downturn happens near or in retirement. But the translation must be as trustworthy as it is transparent. That’s why a guaranteed income stream—like one offered through annuities—that starts building long before retirement can provide the foundation for this income “preview.”
Acknowledging the growing need for better insights into future income, the SECURE Act of 2019 established a lifetime income-disclosure mandate for plan sponsors. Proponents argued that participants need to know (and plan for) their future retirement income—and that DC plans must regularly provide a road map. And while the disclosure is somewhat basic, it still raises much-needed awareness of how far (or short) their retirement savings will go.
Income Awareness Has Been Linked to Higher Participation…and Savings
New disclosure requirements may mean more work for sponsors and their service providers, but the well-documented advantages of fostering an income mindset seem worth the effort, in our view.
When income is front and center, for example, participants are more inclined to engage and save, based on our experience. In fact, among 75,000 active participants in our DC plans that offer an in-plan guaranteed-income option, over a seven-year period we saw a 12% higher savings rate for those who were more directly engaged with their income strategies versus those who weren’t.
The need to start saving more and earlier is hardly a new concept, and who better to reinforce its importance than today’s retirees? Some 52% said they would have put away more money while they had the chance—much higher than the percentage who prioritized their own good health in the lead-up to retirement—based on the AllianceBernstein (AB) survey Inside the Minds of Plan Participants (Display).
