Scrabble aficionados will find that while the game itself has not changed much over the years, technology advances have added new dimensions with word lists, builders and access to a multitude of opponents. Skill, strategy and luck are still needed to win, but technology has made for richer game play with a greater level of control.
The same can be said for retirement planning. While the fundamentals remain the same, technology can be a game changer for plan sponsors that want to help employees better understand and appreciate their plans and make decisions that will provide the best chances of building sufficient retirement income.
When it comes to retirement planning tools, some key considerations apply regardless of the plan design or workforce. Tools should be personalized to each member using personal information such as age, salary and recent account balances. They should be customized to the plan particulars, reflect important provisions such as early retirement reductions or contribution matching rules and reinforce important messages.
Retirement planning tools should be intuitive and interactive, using simple, straightforward language. Members should be able to get results quickly, with minimal inputs and steps. Ideally, tools should be accessible from a variety of locations. However, accessibility must be balanced with security and privacy.
Most important, these tools need to help members get a sense of how much income they will need in retirement, as well as how much of that income will come from their employer-sponsored plan versus other sources. Members are more likely to use tools that allow them to build a complete retirement picture, taking into account personal savings, government benefits and other sources of retirement income, such as potential income from prior employer plans.
Evaluating the income that an employee will need in retirement is tricky and very much based on personal goals and circumstances. However, there is much that plan sponsors can do to help. For example, many plan members don’t fully understand or appreciate the impact that future medical costs could have on their retirement savings. Sponsors can use technology to help employees become more aware of their healthcare needs by projecting expected expenses after retirement and demonstrating the impact of key influencing factors.
Technology can be particularly effective when the calculations show a gap between the anticipated income needs and the level of retirement income that a member can expect from available sources. The best tools will provide specific tips or guidance on how to bridge the retirement income gap and encourage members to take action. The intent is not to replace personal financial planning but to raise the bar on financial literacy among plan members.
DB: The broader picture
In the DB space, technology best supports members by playing a self-service role, helping members to get a sense of their potential retirement income and options at various ages.
Understanding plan specifics is less important than knowing what to expect. As baby boomers retire, giving members the ability to run multiple retirement income estimates on their own enables a plan sponsor to provide a more engaging, less transactional level of support.
For more complex DB plans—such as those with one-time or ongoing choices (e.g., join a DC component, participate in another level of DB) that allow ancillary contributions to enhance the core DB benefit or offer portability—tools can go beyond self-service to provide decision-making support. A member can quickly model the range of expected retirement income under various options, assess the risk of over-contributing to an ancillary account or simply better appreciate the value of a DB pension.
DC: Making better decisions
DC plan members have many choices to make: how much to contribute, how to invest, when to retire and what to do with their account balance. The primary role that online tools can play for DC members is to provide decision-making support.
DC tools should help members understand the leap from accumulating assets to providing retirement income, allowing a member to compare expected retirement income with anticipated needs. Naturally, this income is dependent on accumulated assets at retirement, which, in turn, depend on contributions made during a member’s working life. Next-generation DC tools will allow members to easily model the impact of their contribution behaviour (e.g., reflecting any matching contributions or changes in the level of match over time) on their projected retirement income.