Data & Research August 31, 2016

DC Plan Participants Need to Know Fundamentals to Feel More Secure

Participants 'unsure' about their retirement prospects admit they need knowledge about investing and haven't calculated how much they need to retire, and they are less engaged in their DC plans.
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Only about half (52%) of individuals participating in defined contribution (DC) retirement savings plans believe they are “on track” for retirement,  but BlackRock says retirement confidence is within reach for many more.

BlackRock’s DC Pulse Survey of 1,003 DC plan participants found 28% reported feeling “unsure” about whether they are on track for retirement.  The survey revealed people “unsure” about their retirement prospects are much more likely than those “on track” to admit that “I don’t know as much as I should about investing for my retirement” (66% vs. 38%, respectively) and “I don’t know how much money I need to save in order to fund the retirement I want” (68% vs. 32%, respectively).

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“Unsure” participants also are less likely to be taking proactive steps to improve their knowledge. For example, just 11% of those “unsure” have calculated the amount of money to set aside now for retirement (compared with 35% of those “on track”). Similarly, just one-quarter of “unsure” individuals have developed a good sense of how to generate ongoing retirement income from their savings (vs. 68% of people “on track”).

According to BlackRock’s analysis, the link between a basic understanding of key retirement planning principles and retirement confidence holds true for people at all income levels—suggesting that such confidence is not simply a function of greater financial resources.

“Unfortunately, many individuals who consider themselves ‘off track’ face financial realities requiring support beyond their DC plan,” says Anne Ackerley, head of BlackRock’s U.S. & Canada Defined Contribution Group. “But the good news is that people who are unsure about their retirement standing may be able to build their confidence with relative ease by working in the near term to close critical knowledge and saving gaps.”

NEXT: Lack of DC plan engagement

The survey also found that across the board, “unsure” individuals are less likely than “on track” participants to engage with their DC plan. Those “unsure” were less likely than those “on track” to say they take full advantage of retirement savings guidance provided by their employer (43% vs. 67%, respectively) and also less likely to have increased their contribution in the past 12 months (35% vs. 47%). They also reported less engagement in evaluating their investment options (25% vs. 38%) and were less likely to report that they evaluate their investment options at least quarterly (29% vs. 50%).

Significantly more women said they are “unsure” about their retirement than said they felt “off track” (33% vs. 21%, respectively). Women’s general sense of unease about retirement also translates into lower levels of confidence and retirement preparedness: They were less likely than men to report feeling confident about being able to retire by the age they want to, handle unexpected costs in retirement and enjoy the lifestyle they want.

Women who are “unsure” about their retirement acknowledged that they could be taking greater advantage of retirement tools and resources already at their disposal, particularly those available in their DC plan. “Unsure” women were more likely than “unsure” men to agree that they don’t spend the time they should to understand their employer’s retirement plan (55% vs. 41%, respectively) and don’t feel that they are doing as much as they should with their plan (57% vs. 42%).

But women generally also put a very high value on their workplace plan. They were significantly more likely than men to say that their plan will be extremely or very important to ensuring a secure retirement (74% vs. 66%) and that it will be their biggest source of retirement income (58% vs. 51%).

“Our survey shows that plan engagement is a key vehicle for boosting retirement confidence—and that’s a critical message for plan participants and sponsors alike,” says Ackerley. “Individuals need to take greater advantage of the tools already available to them through their plan. And plan sponsors can feel confident that adding more and better tools for their DC participants is a worthy effort—because a robust, participant-focused DC plan really does have the power to make a difference.”

More information from the survey is here.

Data & Research August 31, 2016

Research Finds Most Retirement Calculators Inefficient

According to research published in The Financial Analysts Journal, most retirement calculators fail to take into consideration key tax implications. 
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An article written by William Meyer, CEO, Retiree Inc.; William Reichenstein, Co-founder, Retiree Inc., and Kirstin A. Cook, professor at Texas Tech University, suggests that most retirement tools are based on the flawed conventional wisdom that retirees should withdraw funds from one account at a time starting with tax-deferred accounts and moving on to tax-exempt accounts. The authors argue this method is not the most tax efficient.  

“Through our research, we found there are better strategies for creating retirement income than the ones the industry is currently using,” says Meyer. “These strategies provide greater tax efficiency, creating six or more years of income. That’s a game changer for a retiree.”

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The research demonstrates that the most tax-efficient strategies take into account progressive tax rates, consider drawing from multiple accounts concurrently and using Roth conversions—all while taking advantage of years when the investor has lower marginal tax rates. The research shows that using these unconventional strategies can add more than six years of portfolio longevity compared with a conventional strategy.

Other studies including one by Corporate Insight found concerning differences in retirement income calculators even when inputting the same data. 

Retiree Inc., produces retirement income planning software for both financial professionals and consumers. The authors’ complete research can be accessed online here.

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