We spoke with the author of this article, IRIC Executive Director Kevin Crain, about the importance of retirement preparedness.

Q: Why must sponsors of defined benefit (DC) plans provide retirement income projections to plan participants?

A: Providing retirement income projections is consistent with how individuals think about their lives after retirement. After retirement, individuals think about how much income they can live on monthly or annually, not what their total 401(k) balance is. By providing retirement income projections, individuals can also do integrated retirement income planning. Combining the DC plan’s retirement income projections with Social Security projections. DC retirement income projections are consistent with how individuals obtain information about other sources of retirement income. Social security information is based on estimated monthly income.

Plan sponsors benefit as this will encourage younger generations to appreciate and accumulate more assets in the plan. It will increase younger generations’ satisfaction with the benefit. And motivate them, especially as younger generations question whether Social Security will be there in retirement. For funds to older generations, projected retirement income information will allow plan sponsors to improve early retiree education programs as well as help early retirees make robust retirement income projections. This is consistent with recent industry studies showing that plan sponsors feel more responsible for participants staying in the plan after retirement.

Q: How important is shifting the focus of retirement savings from total savings to periodic income projections for effective retirement planning?

A: It is very important. It is difficult for participants to convert total balance information into calculated pension amounts. It is also important to provide similar information across the main pillars of retirement income – 401(k) plans and Social Security. This will allow individuals to make a more informed decision about the critical question of when to choose Social Security. Currently, about 40% of individuals choose Social Security at the earliest date – age 62. Only 10% elect to their maximum benefit value – age 70. If the individual waits until age 70, the benefit is 70%+ higher than age 62. With DC plan retirement income projections, individuals can make an informed decision about whether to first use DC plan assets to fund their first retirement, allowing them to delay taking Social Security.

Q: How important is it for DC plans to generate sustainable retirement income?

A: This is a critical trend for DC plans. To offer the participants”retirement income options in plan” along with retirement income projections. More than 60% of participants believe their DC plan will be a primary source of retirement income. 70% or more of participants want “retirement income in plan” options. Meanwhile, nearly three in four sponsor plan feel responsible for providing these options and 40% or more of retired DC plan participants “stay in the plan” for at least three years with their plan assets.guaranteed retirement income within the plan.

Q: What retirement planning tools and various retirement income products can improve participants’ retirement readiness?

A. There is a robust pool of retirement income within plan products. Hybrid target date funds, hybrid managed accounts, managed accounts with annuity features, annuities for use with dividends, installment payments and more. Plan record keepers implement these solutions on their platforms. Investment and insurance companies create products. Consultants and advisors begin to help plan sponsors on how to evaluate and select options in the plan. The Institutional Retirement Income Council, where I am executive director, is very active in the industry and works with the institutional constituents to increase plan sponsor comfort and familiarity with the offerings. The end goal is to drive large adoption.

Q: What legislative reforms require revenue projections to be included in DC plan statements?

A: The recently passed SECURE 2.0 Act mandated that DC plans provide participants with an annual estimate of the projected monthly retirement income their current balance would provide. The DOL provided additional guidance after SECURE 2.0 passage on how the information should be calculated and reported.

Q: What is the best strategy for aligning retirement planning with retirees’ preferences for predictable, periodic income, ensuring a more secure and manageable financial future?

A: It is critical for plan sponsors to enhance their financial wellness programs to include robust education for early retirees, including tools for calculating retirement income. Plan sponsors should also provide education about Social Security and Medicare. In fact, early retirement education should be offered to participants at younger ages – 50 or 55. Plan sponsors should not wait to offer this education until participants are close to retirement. This will allow participants to have time to continue accumulating assets before retirement and be well prepared when it is time to retire. Financial wellness studies have shown that participants are not well informed about Social Security and Medicare and would like their employers to help them with that before they retire.