Lessons Learned from BlackRock's 2012 Retirement Survey

By Anthony Edwards and Tony Mastrogiorgio

Retirement is changing—and the new world that's emerging is not necessarily what we expected it to be. At least, that is one of the conclusions to draw from BlackRock's 2012 Retirement Survey.

Clearly, plan sponsors are doing many things right, especially when it comes to helping participants accumulate retirement savings. But in the face of growing uncertainty about the future—driven by economic, demographic and regulatory challenges—many are legitimately concerned about arming the next generation of retirees with the tools they need to enjoy a secure retirement.

BlackRock's annual Retirement Surveys have tracked beliefs and behaviors around retirement so that we can better understand how to meet the needs of our defined contribution clients and their participants. This year, to get insight into what creates a successful retirement, we expanded the survey to include over 1,000 recent retirees.

Why recent retirees? Because as retirement evolves, who better to discuss the realities of retirement and provide guidance to current plan sponsors and participants? While the survey did include some longer term retired in the database, the average age was 67, meaning that they are emerging from a workforce that is substantially similar to the leading edge of Baby Boomers. In order to help understand the effectiveness of DC plans, the self-described "retired" had to have been in a DC plan for at least five years.

One of the most surprising findings to emerge is that recent retirees' experience of retirement is more positive than the expectations of current participants. This gap is considerable-more than half of retirees are confident they will have enough money to live comfortably in retirement, as compared with only a quarter of plan participants.

What has caused this gap in confidence? Is it the difference between having made the transition into retirement as opposed to the "great unknown" those still in their careers sense lurking around the corner? That may be the case, but the survey provides an opportunity to dig into this gap to identify several factors that seem to be correlated with retirement confidence.

Notably, the survey found a clear connection between secure retirement income and retirement confidence. Of course, traditional sources of retirement income, including defined benefit pensions and social security, are in decline. Participants can, to some extent, replace this important financial and psychological foundation of retirement security themselves through an individual annuity, but there are numerous reasons to hope for more efficient, in-plan income solutions. Ultimately, solving this problem is a challenge for plan sponsors and DC providers.

Perhaps the most intriguing—and inspiring—conclusion to be drawn from this year's survey, however, is the extent to which creating confidence is in the hands of participants themselves. This is an important finding. We have identified seven habits that highly confident retirees practiced throughout their working career. They are easily understandable and easy for today's participants to emulate.

At a time when a great deal of media coverage of retirement seems calculated to inspire gloom, we have the opportunity to give participants an action plan to better their chance at a secure retirement. Fortunately, today's participants are receptive to the lessons shared by the recently retired: almost 92% of participants agree they can learn from retirees when it comes to retirement planning.

Essential Habit # 1 "Making the Most" Out of the Savings Plan

Many participants ignore their plans. Contributions are deducted and maybe—just maybe—they review their quarterly statements. Engaged participants regard their plan as a source of information and guidance. They want to know what the current best thinking about retirement savings is, and they act accordingly.

Action steps: Plan sponsors need to think of new ways to keep their plans top of mind with their participants.
One suggestion is to have participants annually review their 401(k) elections along with their health benefits. This creates a yearly contact point to help participants get engaged.

Essential Habit # 2 Increasing Contributions to Savings Plan Whenever Able

The most confident and successful retirees report increasing their contribution percentage after annual pay hikes, promotions and bonuses. Auto-escalation features can help all participants achieve this automatically.

Action steps: In addition to auto features, make it easy for participants to increase contributions when they get a raise or to defer part of their bonus into their plan.

Essential Habit # 3 Estimating Retirement Income

Sometimes it's nice to take a trip and not know where you are going. Successful retirees, however, will tell you that saving for retirement is NOT one of those times. They used in-plan tools and external resources to understand how their savings might translate into post-retirement spending.

Action steps: Add income projections to participant statements so they can track their progress toward their retirement income goals.

Essential Habit # 4 Reviewing Strategy on a Regular Basis

If Habit # 3 is checking your destination, Habit # 4 is all about checking the road map (or installing GPS). Successful, confident retirees ask the question, "Is this the way to get where I'm going?" It's an all-inclusive question, from their contribution to their work plan through to their additional savings and social security estimates.

Action steps: Our survey shows that retirees value advice from their former employers—in fact they wanted even more. Offer access to holistic tools that help participants assess their entire retirement picture.

Essential Habit # 5 Changing Investment Mix As They Age

A 25-year old with forty years of earning potential ahead of her should not have the same asset allocation as a 65-year old set to retire next week. Qualified default investment alternatives (QDIA) such as target date funds may be the most efficient way to manage the changing needs of participants moving throughout their careers.

Action steps: The longer an employee's tenure with a company, the less likely they are to be in a target date fund—and the more likely they are to be in an investment option chosen when their needs were quite different. Reach out to tenured employees and encourage them to review their previous choices.

Essential Habit # 6 Enrolling Early

Time is on your side. Yes it is—but only if you use it. For some, unfortunately, it is too late to start early. But the clear connection between tenure in a workplace savings plan and retirement security should motivate late starters to get going.

Action steps: Even if it is too late to "start early," reenrollment into a target date fund or other QDIA with an appropriately high default deferral rate will help prevent procrastinators from waiting any longer.

Essential Habit # 7 Saving the Maximum

Successful retirees sacrificed to save the maximum, including the "catch up" provisions allowed for participants older than 50.

Action steps: There are many ways to gently persuade participants to save more. One of the most effective is by adjusting the employer match. Matching 100% of a participant's first 4% in contributions is roughly the same cost to the plan as saving 50% of their first 8%.

The seven habits offered here are not particularly surprising—nor should they be. There is no secret method or brilliant investment choice that will solve a participant's retirement challenges. Rather they emphasize just how much power participants actually hold in their own hands when it comes to building security. It's a blueprint that has worked.

Survey Says: You Can Build Retirement Security

Retirees who are confident about their finances overwhelmingly indicate that they took positive steps to improve their retirement saving.

I increased my contribution to my retirement savings plan when I was able to 90%
I made the most of my 401(k) plan 87%
I estimated my retirement income 84%
I reviewed my retirement savings strategy on a regular basis 83%
I changed my mix of investments as I got older 79%
I enrolled in my retirement savings plan early enough in my work life 77%
I saved the maximum amount of money permitted by my plan 73%

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