Large employers, while somewhat out of touch with employees’ needs with respect to current retirement savings, are beginning to pay a lot of attention to their ultimate income requirements in retirement. More than two-thirds (69%) of plan sponsors polled by BlackRock “agree that there’s a growing need for DC plans to provide retirement income solutions and services,” according to the company.

The survey of 1,003 defined contribution plan participants and 200 sponsors released Feb. 24 by the asset manager also found that about half (51%) already do provide some form of income solution.

[Image credit: Fotolia]
[Image credit: Fotolia]

Most (60%) of the surveyed plan sponsors (all of which have at least $300 million in plan assets) expressed a desire for plan participants to keep their retirement fund in the 401(k) after they retire.

Twin risks

Speaking at a press conference when the survey was released, BlackRock chief retirement strategist Chip Castille highlighted the challenge retirees equipped primarily just with DC plan assets face. “What makes retirement difficult for the individual is they have to manage two risks: market risk, and longevity risk.”

Plan sponsors generally appear to appreciate the scope of that challenge, and its implications for them if they fail to help to address it. Nearly half (49%) of survey respondents agreed with the statement, “my organization is facing an impending retirement crisis where participants will keep working because they are unable to afford to retire.”

Nevertheless, things may be worse than even some of those concerned employers realize. That’s because many sponsors give employees more credit for understanding their retirement planning needs than the employees do themselves.

“What makes retirement difficult for the individual is they have to manage two risks: market risk, and longevity risk.”

For example, 64% of the surveyed employers believe participants know how much they need to be saving, but only 37% of participants believe they do. A similar gap was found with respect to participants’ understanding of their investment options. Also, 59% of employers believe that the majority of their plan participants are saving enough, but only 28% of participants believe they are.

Generation gaps

The survey revealed significant differences in these numbers based on participant age. Millennials, for example, are more apt to consider themselves on track for retirement than Gen Xers (59% vs. 43%). Yet millennials have been less inclined than Gen Xers to increase their contribution rates.

Baby boomers were more consistent; 54% consider themselves on track for retirement, and 53% have increased their contribution rates. Still, the fact that only slightly more than half of boomers, on the threshold of the traditional retirement age, feel unprepared is a serious warning sign for employers.

Also, boomers are split in several directions on the question of what to do with their DC funds when they retire. Roughly equal proportions plan to keep their funds in the plan, move funds out and manage those investments on their own, roll over the funds at invest with a financial adviser, and “not sure.”

Nearly half (45%) of participants from all generations do not believe they are getting enough information about how to handle their retirement savings, and 49% of plan sponsors believe they lack the resources to meet that challenge.

BlackRock, which pioneered the target-date fund concept in 1993, established a tradition of focusing on ways to improve plan participants’ prospects for retirement income adequacy. Three years ago the company introduced the CoRI Retirement Indexes, a reference tool that helps retirement savers “translate your nest egg into a retirement income estimate,” according to the company.

Retirement indexes

CoRI factors financial market conditions, interest rates, inflation rates, and the employee’s age to attach a cost of each dollar of retirement income that would begin at age 65. For example, CoRI currently estimates that a 55-year-old will need to have saved $15.72 today for every dollar of retirement income that will be generated by current savings at age 65.

Last fall BlackRock launched iRetire, a tool intended to support financial advisers’ efforts to engage their clients in the process of determining retirement savings gaps and steps required to close them.

BlackRock’s takeaways from the survey with respect to actions employers should take to maximize the effectiveness of their DC plans include:

· Analyze plan design and model changes,

· Adopt auto-enrollment and auto-deferral increases,

· Focus on generation-based distinctions in participant needs, and

· Prioritize communications to get traction with employees.

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