Empower Finds Four Drivers to Lifetime Income Success

Adds health state to all retirement replacement rate calculations in participant tool.

Americans are on track to replace 58% of current income in retirement, and four factors can help increase that number dramatically, according to Empower’s 2015 Lifetime Income Score research.

The 58% replacement rate (including Social Security), found in the fifth edition of this research, is a slight dip from last year’s reading of 61%.

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Although the research covering 4,000 Americans found that lifetime income scores—the trajectory to replace current income in retirement—are driven much more powerfully by savings behavior than by income level, Empower’s research found there were four factors that had the most influence on retirement preparedness. These factors are access to a workplace retirement plan; participating in a defined contribution plan and deferring 10% or more of income; having automatic deferral escalation inside the DC plan; and having a professional financial adviser.

The differences when those factors are considered are great. For example, those with a workplace plan are on track to replace 74% of income, while those without have a replacement rate of 42%.

In regards to automatic escalation, adoption of this key factor has hit a plateau. Edmund F. Murphy III, president of Empower Retirement, believes slowing uptake of automatic escalation may in part be determined by whether the decision to adopt is driven by the HR or finance groups at a plan sponsor. Murphy says when this plan design element is not in place, participants can be helped by engaging with some of Empower’s online participant tools, such as the peer comparison and the health cost estimator, that may encourage them to increase their deferral rates.

Having a professional financial adviser (individuals paying for advice are on track to replace 82% of income, compared to those without a paid adviser having a replacement rate of 55%). This can be related to two findings, notes W. Van Harlow, research director, Empower Institute: those who work with an adviser typically have a plan and are also allocated differently, with less allocated to cash. In fact, although savings portfolios outside qualified retirement plans continue to hold a great deal of cash, at 36%; within qualified plans, the cash position is even higher (55%) unless the worker has an adviser (cash drops to 35%).

Murphy says this year’s methodology in calculating the lifetime income score was changed to include health state, which has a large influence on costs and how one needs to save for retirement. As the percentage of healthy households—defined as not having someone with one of the six major health states—declining as people age (from 43% for ages 30 to 39 to 21% for ages 60 to 65), and more of their existing retirement savings needing to be earmarked for healthcare, he says.

Overall, Murphy says that evaluating the overall Lifetime Income Score numbers made him believe that the status of the nation’s security is not in crisis, as some have said, but rather, the nation has “a retirement savings challenge,” which requires the country to strengthen and enhance the current system. He indicates that the 2015 Lifetime Income Score research, which is released by the newly-launched Empower Institute, provides “a roadmap” to important opportunities for employees, employers, retirement plan advisers and consultants, and policy makers.

SURVEY SAYS: Staying Educated

There are many ways retirement plan sponsors and those that serve them can keep themselves up-to-date on plan design and administrative trends and best practices, and new rules and legislation.

Last week, I asked NewsDash readeers, how do you keep yourself educated about these things?

Nearly three-fourths (73.7%) of responding readers work in a plan sponsor capacity, while 10.5% are advisers or consultants and 15.8% work in a TPA/recordkeeper/investment manager capacity.

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Asked which method/tool they use to keep themselves educated about plan design and administrative trends and best practices, as well as new rules and legislation, “industry magazines and/or websites” was selected by the largest percentage of readers (84.2%). And, though our intent for asking this question was not to garner kudos for us, I promise, among the respondents who selected “other,” most listed PLANSPONSOR or NewsDash as their resource for staying up-to-date. Thank you!

Nearly 80% of responding readers said industry webcasts were a source of education for them, and 60.5% said meetings or calls with advisers/consultants kept them educated. Fifty-five percent chose industry seminars and conferences—with one of the “other” respondents specifying the PLANSPONSOR National Conference; 47.4% chose “meetings or calls with providers/TPAs” and 42.1% selected “certification programs and the continuing education for them.”  

Updates from legal counsel and general financial publications were listed with the “other” responses. Only 8% of respondents selected books as a source of staying educated. Among those, a respondent suggested the 401(k) Answer Book and the 2015 Pension Answer Book, which is updated annually. One respondent said books are outdated by the time they go to print, and another suggested education by Dr. Seuss in “One Cent, Two Cents, Old Cent, New Cent.”

Among comments about staying educated about retirement plan trends, administration and compliance were more kudos for PLANSPONSOR and NewsDash. Again, we thank you. Commenters noted how staying up-to-date is so necessary due to the constantly changing landscape of our business. One reader suggested learning from peers at other companies. Editor’s Choice goes to the reader who said: “Sometimes the school of hard knocks is a good place to learn – this industry ain’t one of those places.”

A big thank you to all who participated in our survey!

Verbatim 

It's part of the job, you have to keep current for compliance purposes, and to be an employer of choice.

There's a lot to learn and its seems to be always changing.

I love NewsDash because it gives me such a wealth of information in a condensed, convenient format. I've learned info. from these e-mails even before our Plan Rep notified us. I've even asked them about info presented on NewsDash, and they had to go check on it, because they hadn't heard about it. (They should read NewsDash...) 🙂

ALWAYS READ ARTICLES REGARDING THE LATEST CHANGES AND TRY TO KEEP USPDATED DUE TO THE ALWAYS CHANGING WAYS OF RETIREMENT PLAN ADMINISTRATION. NEWS DASH DOES A GOOD JOB OF THAT I LOOK FORWARD TO REVIEWING IT EACH MORNING TO SEE WHAT IS GOING ON IN THE RETIREMENT WORLD!

The daily NewsDash is my favorite - easy to browse through over my morning coffee & I love being able to save & share articles with colleagues. Thank you! 🙂

Learning from peers at other companies is my preferred method for staying on top of industry trends. Receiving alerts (typically from online resources) keeps us up to date on compliance regs - and we typically do much of the research ourselves before meeting with attorneys to make sure we've properly interpreted the information.

There are so many choices, just don't stop.

It is tough to keep up with everything, especially when the retirement plan is just one small piece of my responsibilities. It really makes me appreciate our consultants!

I wish the decision makers and budget managers at my company would approve more seminars and conferences. I think we rely too heavily on investment advisers, TPAs and consultants.

It's gotta be done.

PLANSPONSOR and NewsDash are the best!!

It's the first thing I do, click on my daily sites. It takes a few minutes to scan the headlines and keeps me current. My experience working in this industry has been self-education.

Sometimes the school of hard knocks is a good place to learn - this industry ain't one of those places.

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Asset International or its affiliates.

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