Retirement industry consensus holds that the country is unprepared for retirement.

Creating access to workplace retirement plans for the estimated 68 million Americans without it will clearly be part of solving the problem going forward.

But what about improving readiness for those with access to workplace plans? Automatic enrollment, which more than three-quarters of sponsors now use by some estimates, certainly has bolstered participation rates.

Yet simply participating is proving to not be enough. One study by a leading financial education firm shows 80 percent of employees don’t think they are on track to adequately replace their income in retirement, even though they are participating in a workplace plan.

The $64,000 question is why. Researchers at Financial Finesse, a Southern California-based company dedicated to implementing workplace financial wellness programs that are wholly agnostic about investment product preferences, thinks the answer may come down to basic financial aptitude.

That aptitude, or lack of it, is explained in part by a lack of access to basic financial education tools, like retirement income projection models.

The company’s data present a convincing correlation. More than 75 percent of the participants who said they were not on track to adequately fund retirement reported never having used a retirement calculator to run income projections.

That number is likely to change for the better in the foreseeable future. Such projections may become the standard, perhaps as soon as next year, as the Department of Labor continues its push to finalize a rule that would require retirement income projections in 401(k) account statements.

The idea is simple, of course. By translating existing savings and contribution rates into income projections, participants can get a better idea of how much more they need to be deferring in order to meet their goals.

Such capabilities, once a specialized feature for participants in managed accounts, are becoming a more standard part of platform innovations rolled out by retirement plan providers, even before the DOL’s impending requirement to offer an annuitized estimate of income based on existing savings.

Financial Finesse also found that nearly half of the participants it surveyed have never taken a risk tolerance assessment, and only 31 percent of participants have rebalanced their portfolios.

The latter action—knowing when to move risk from asset allocations—requires a fairly sophisticated financial IQ. It stands to reason that higher earners have had more access to basic financial education and investing concepts, but Financial Finesse’s numbers show that even wealthier participants are lacking in comprehensive retirement readiness, potentially meaning that even wealthier workers lack the knowledge to self-guide their retirement program.

Only 34 percent of participants making more than $200,000 say they are on track to retire comfortably, and more than half of those who say they lack confidence in their retirement preparation have never run an income projection model.

That’s better than those in lower income brackets: 14 percent of those making between $35,000 and $60,000 claim to be on track for retirement, versus 22 percent making between $100,000 and $150,000. But preparedness is still shockingly low for wealthier workers.

Access to retirement income modeling has a negative correlation to income: As workers make less, fewer save without modeling income. Nearly two-thirds of workers making $100,000 a year don’t run income projections.

Financial wellness is quickly becoming a catchphrase in the 401(k) industry. In theory, its virtues for both participants and sponsors are hard to dispute. Financial Finesse’s data show that the more often participants engage with information in wellness programs, the better their chances to have adequate emergency cash and better control of household debt and their overall finances.

As those components of participants’ financial lives become secure, naturally they become more cognizant of their retirement prospects and are able to defer more of their earnings to 401(k)s.

Time will tell how sponsors view the value proposition of financial wellness programs, and whether or not they are willing to pay for them.

But regardless of wellness programs’ adoption, retirement income modeling is quickly becoming a de facto feature of the most innovative retirement platforms. Even absent a comprehensive financial wellness program, advisors have the capability to steer participants and sponsors to the best platforms, and to shout from their bully pulpit why those models may be the most efficient way to motivate increased savings rates.

Instant Insights /

Income projection tools could hold key to improving savings rates

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