Heard Off the Street: Monthly retirement assays gain ground
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To help workers get a better idea of whether they are saving enough for retirement, more employers are going beyond the one number that workers with 401(k) plans focus on: how much money is in their account at the end of the latest quarter.
A growing number of employers are using the account balance to estimate how much monthly income a worker can expect from the retirement savings plan once he retires.
Many benefit and retirement savings experts expect more retirement plan participants will be receiving these estimates in a few years, citing U.S. Department of Labor plans. The federal agency, which oversees the plans, intends to seek public comment this year on whether employers should be required to provide monthly retirement income estimates and how they should present the information.
"I think seeing a projection of 'this is what I'm going to get' might change some savings habits," said Arthur Hazen, director of retirement plans for BPU Investment Management, Downtown.
Mr. Hazen said the practice is not prevalent yet, "but it is certainly out there."
Getting an estimate of monthly retirement income might boost retirement savings in several ways.
Younger workers may look at their 401(k) account balances and think they'll never be able to save enough for retirement. But getting a number that illustrates how much income saving on a regular basis for 30 or more years and compounded returns can produce might encourage them to stick with it and maybe even save more.
As workers age and start thinking about retirement more seriously, the estimates could nudge them toward saving more and help them make more informed decisions about when they can afford to retire.
"Every year, it will steer you a little more in the right direction," said Frederick Reish, an attorney with Drinker Biddle & Reath in Los Angeles. He said just looking at the account balance does not give investors "a good feeling of whether it's enough or not."
Many record keepers -- the companies that employers hire to administer their 401(k) plans -- have tools on their websites that help people estimate what kind of monthly income their account is likely to produce.
But getting investors to use those tools can be difficult. One reason is that employees have to make a series of assumptions that even professionals can struggle with: what sort of investment returns they can expect over 10, 20 and even 30 years; whether the size of their paycheck will increase; how long they will live in retirement; and how much inflation will eat into their savings.
Making the wrong assumption can lead to the wrong decision. Mr. Reish said that although many couples who retire at 65 expect to live 20 more years, statistics show otherwise. For a husband and wife who are both age 65, there is a 50 percent probability that one of them will live to be 92 and a 25 percent chance that one of them will make it to 95, he said.
That's where the online calculators available to most 401(k) participants can help. Howard Heller with T. Rowe Price's retirement plan services unit said calculators help investors develop a range of retirement scenarios based on different levels of savings and rates of return. They also allow investors to add in Social Security, pension benefits, IRA accounts and other sources of retirement income to get a more complete picture.
About 40 percent of the companies that rely on Aon Hewitt to administer their 401(k) plans are providing more than just the account balance. Retirement practice leader Byron Beebe said some provide an income estimate based on the 401(k) balance while others offer more complete statements that include pension and retiree health care benefits.
"When companies do that, we do see more participants take action and actually increase savings rates," he said.
He said what is stopping some companies from adopting the practice is their concern that workers may take the estimate as fact even though changes in salary, savings levels, stock market performance and other variables will cause the estimate to vary from quarter to quarter and year to year.
"Companies are a little bit reluctant to project a balance that is not guaranteed," Mr. Beebe said. "Companies are really not trying to mislead people. They are trying to help them."
Benefit experts expect the Labor Department will eventually adopt rules about the estimates. Mr. Heller said the two most likely possibilities are requiring employers to provide monthly income estimates or make the disclosure voluntary but provide guidance on how to do it for those who opt to provide the information.
Benefit experts caution that a monthly income estimate is not the final answer. Investors should seek the advice that many companies make available to retirement plan participants to discuss what's behind the estimate and how they might boost their monthly retirement income.
"A more detailed approach on an individual basis makes more sense," Mr. Hazen said.
First Published February 24, 2013 12:00 am