Three participant realities—and ways to improve your next retirement readiness assessment
Are you looking for reasonably priced, high-impact ways to improve retirement readiness in the months ahead? Inspired by the research in our “State of the participant 2021”¹ report, here are three observations on what retirement plan savers are going through today—and next steps you might consider to ease their journey going forward.
1 The market’s wild ride—and the need to prepare for stock market volatility
Early in the second quarter of 2020, every sector of the stock market dropped suddenly, led by plunges in small- and mid-cap U.S. stocks. While the broader economy continued to bear the weight of the COVID-19 pandemic, the markets rebounded quickly. Returns were positive by summertime, and the indices continued to improve through the end of our “State of the participant 2021” study period on September 30.
As it turned out, few participants in our clients’ plans fled to nonequity investments in reaction to the market’s dip. And this, in turn, allowed average balances to recover as well.
Monthly and total percentages in participant account balances and the S&P 500 Index from March through September 2020
Next step: Prepare all participants for that next inevitable move in the market
Last spring, visits to our public website spiked as plan professionals found and downloaded ready-to-use resources to help participants deal with volatility in real time.
But, of course, the best time to teach retirement investors and participants how to weather the storm is when things are calm and decisions aren’t driven by panic. Make sure your plan communication strategy includes education on how markets move, as well as skill building in avoiding impulsive mistakes and how to take a long-term approach to investment management.
2 Participants embrace personalized retirement planning tools
According to John Hancock’s 2020 financial stress survey, 95% of participants feel that projections of the income they’ll need in retirement would motivate them to save more. In March 2020, we granted participants their wish with the rollout of our retirement planner tool.
Featured on our participant website homepage, our retirement planner2 uses predictive analytics to provide every participant with:
- A detailed breakdown of their projected expenses—including healthcare—and net cash flow for each year of retirement
- A chance to adjust their expenses based on their expected retirement lifestyle, their current health, and more
- The ability to model different scenarios and fix any potential shortfall by saving more, adjusting their retirement lifestyle expectations, or adding outside assets
The power of personalization became immediately apparent. Despite the many distractions that workers experienced last year, we found that many were motivated by the chance to see their own retirement expense projections tailored to their specific goals.
Over 90% of those who accessed the retirement planner tool between March and December 2020 took the effort to personalize projections by providing additional information. And with more clarity around their potential retirement expenses, one out of every five increased their deferral rate on the spot. The size of those contribution increases ranged from 4.0% to 5.2% of salary, depending on their age group.
Percentage of participants completing the planning tool sequence who also increased their contribution—with average size of increase
Next step: Support your participants’ interest in finite, goal-oriented planning
With the realism of spending projections introduced to the planning process, participants were willing to stretch to improve their retirement prospects. For a 30-something participant, increasing their 401(k) deferral by four percentage points today could mean a six-figure rise in total savings at retirement age.3
Combining available digital planning tools with personal guidance from your financial professional can help to boost the actual and perceived value of your plan.
3 The perceived shortfall of high-income participants
For benchmarking purposes, John Hancock defines retirement readiness as whether participants’ current account balances, pension and Social Security benefits, and 401(k) contribution amounts put them on track to replace 70% of their preretirement income in retirement.4
But there’s an ironic aspect to aggregate retirement readiness scores: Workers with exceptionally high earnings appear to be the most off target for generating retirement income they’ll need.
It turns out that well under half of employees earning $150,000 per year or more show up as retirement ready. The higher the earnings, the more severe the apparent problem—until you reach those with earnings of $250,000 or more. Only 13.4% of this select group appear to be on track.
Retirement-ready participants by annual earnings
Next step: Ensure that higher-paid participants get the comprehensive support they need
Although 13% retirement readiness among a lower-earning group would be a serious red flag, the first course of action would be obvious—boost contribution rates. The challenge becomes more nuanced with higher earners.
Part of what drives down their retirement readiness scores are IRS contribution limits. Many would save more in their plan, but can’t. Those earning over $150,000 are also more likely to have personal savings and investment accounts or 401(k)s with previous employers.
There are a few good ways to make sure that six-figure earners are getting the guidance and opportunities they need. Offer planning tools and services that factor in all potential sources of income. Regularly promote the chance to consolidate savings in your plan.
And a well-designed nonqualified plan can help you retain top talent by filling a substantial financial gap that even the best 401(k) plan can’t address.
Enhancements focused on guidance can be a smart investment
A few timely adjustments to your educational and guidance offerings can give the whole workforce a better chance for retirement readiness down the line.
Details on “State of the participant 2021,” including access to the white paper, are available here.
1 All data is from our open-architecture platform, which included 1.1 million participants, 1,076 plans, and $76.6 billion in assets under management as of 9/30/2020. 2 The projected retirement income estimates for your current John Hancock accounts, future contributions, employer contributions (if applicable), and other accounts set aside for retirement used in this calculator are hypothetical, and for illustrative purposes only, and do not constitute investment advice. Results are not guaranteed and do not represent the current or future performance of any specific account or investment. All investments carry a degree of risk, and past performance is not a guarantee of future results. Due to market fluctuations and other factors, it is possible that investment objectives may not be met. 3 This projection was generated using John Hancock’s internal data and assumes a 6.0% rate of return, a 3.2% salary growth rate to retirement age, and that contributions remain at 10.0% until retirement age, with no employer match contributions or automatic contribution increase. There is no guarantee that these results will be achieved, and individual results and experiences will vary. 4 The inputs to this calculation include current age, salary, account balance, participant contribution, enrollment in auto-escalation, employer matching and discretionary contributions, pension eligibility, and projected Social Security benefits.
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The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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