It's a perennial issue for 401(k) providers: How can participants be persuaded to boost their plan savings? Recently, a few providers have resorted to scare tactics, adding sobering projections to regular 401(k) statements about how much -- or how little -- employees are likely to have after they retire. Some statements also reveal how much more employees would need to save to achieve the retirement lifestyle they putatively expect.
Traditionally, 401(k) statements have included only basic information about asset allocation and investment performance. In the souped-up model, says Kathryn Himsworth, the Vanguard Group principal in charge of participant education, the statements are "more of an educational tool, rather than just a report."
Vanguard began mailing out its expanded quarterly statements in December, in a rollout that will be complete with the June quarter. New York Life Investment Management Retirement Plan Services, T. Rowe Price and Principal Group are similarly revamping. Since January 2004, Fidelity Investments' annual 401(k) statements have included projections of a hypothetical account balance and monthly income at age 65.
The new statements determine how much money the retiree will be able to withdraw from his or her 401(k) to live on each month, using standard actuarial assumptions. They typically assume, for instance, that people will not change their asset allocation, will retire at age 65 and will live 30 years after that.
The Vanguard, Principal and New York Life statements compare the estimated monthly retirement income to what the person ostensibly will need. That calculation can be tricky.
Traditionally, experts have assumed that people will need 70 to 85 percent of their preretirement income. But with people living longer, many now consider the old estimates to be too low. Although New York Life is sticking with 70 percent, Vanguard figures on 85 percent and Principal on 100 percent.
If the gap is too wide, participants can use online worksheets to fiddle with their assumptions.
Similar modeling has long been available through Web-based calculators like Financial Engines'. But the plan providers' retirement reckonings come with the statements that employees regularly receive.
"Most people don't use online planners because they are much too complicated," says Robyn Credico, national director of defined contribution consulting for Watson Wyatt Worldwide. "Showing it on paper should drive it home."
Providers aren't charging extra for the expanded statements, although New York Life will give its version only to plan sponsors that sign up for its managed-account investment product, which does cost extra. However, all participants in those clients' plans will automatically get the new statement, even if they don't use the managed accounts. If it spurs people to contribute more to their 401(k)s, Vanguard's Himsworth says, "the statement will pay for itself over time."
But will a bright-colored chart showing a big gap between dream and reality change people's behavior? Most of the statements are too new to show results. For its part, Fidelity reports that 5 percent of the 1 million participants who have received its new statements have increased their contribution rate or changed their asset allocation. Fidelity says it is pleased with that response rate.
John Roberts, senior vice president of human resources at Iowa-based GuideOne Insurance, says the calculations his firm's 680 participants have been getting from Principal since last spring send an important message.
"People don't understand how much it's going to take in retirement," he says. "These statements certainly give them an idea of what the hurdle is."
