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Focus on retirement income, not investment return

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Retirement plan participants have suffered in numerous ways in the switch from defined benefit plans to defined contribution plans—and one of those ways is not understanding how their DC plan balance translates into retirement income.

But they’re far more concerned with the performance of their plan investments than with how much that will amount to once they’re retired.

That lack of understanding about retirement income, says a new “Cerulli Edge—Retirement Edition,” needs to change so that participants understand the importance of focusing on potential income rather than investment returns.

While Cerulli research indicates that the majority of 401(k) participants report checking their balances on a quarterly or monthly basis, 80 percent of respondents in the 2015 plan participant survey indicate that when checking their statements, they consider investment performance or their account balance to be the most important information.

Read: How to evaluate 401(k) plan providers

The only participants who were more focused on how that balance would translate into income were those in the 60–69 age range—and even then only 19.3 percent of them concentrated on that aspect of the data.

Cerulli said in the report, “Participants consistently consider DC in terms of accumulation and forget that their retirement savings are meant to play a vital role in their holistic drawdown schedule during retirement. By looking at their balance as a stream of monthly payments instead of one large account, participants will better grasp what their savings actually mean and not just view it in the same manner as a typical brokerage account.”

“There should be a concerted effort to change the mindset of the average saver,” Shaan Duggal, research analyst at Cerulli, said in a statement. “Accumulating a sizable balance and achieving high investment return on a yearly basis are beneficial, but if that balance doesn’t match the projected retirement expenses, there will likely be a shortfall.”

Duggal added, “Managing expectations becomes extremely important, because with people living longer on average, their chances of outspending retirement assets increases significantly.”

While the report said that only a change in mindset, with participants viewing account balances as potential income, would change how they act with regard to such savings, it said that part of the problem was participants’ “lack of access to information about what their 401(k) balance means in terms of retirement income. The Department of Labor,” it added, “is considering a rule wherein this becomes mandatory on account statements.” Cerulli, for its part, the report said, recommends including such information “as a best practice for all recordkeepers.”


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