Winning with Titan

Continued from Income Replacement at Retirement:  Part I

On average, workers who rely solely on a defined contribution plan to fund their retirement are projected to meet just 74% of their needs in retirement—compared to 91% for employees who are also covered by an active or frozen defined benefit plan.

Hewitt’s analysis revealed that workers can significantly improve their situation by making a few small adjustments:

• Start saving: According to recent Hewitt research, 26% of eligible employees currently do not contribute to a defined contribution plan. Hewitt projects these workers will have saved, on average, less than half of what they will need by the time they reach retirement age.
• Regularly increase your contribution rate: Hewitt’s analysis reveals that many workers who commit to increasing their retirement contributions by as little as 1% each year for five years will be on track to meet most of their financial needs in retirement.
• Work longer: According to Hewitt’s analysis, employees who delay retirement to age 67 can significantly reduce their savings shortfall.

Hewitt examined the projected retirement levels of more than two million employees at 84 large U.S. companies for the study.

Income Replacement Ratio Analysis. Hewitt’s analysis uses a methodology that is slightly different from the one which we rely on in performing a comparable analysis.  We use data and assumptions generated biennially by Aon and Georgia State University.  However, the conclusions are similar.  In addition, our expertise and experience lies primarily with smaller publicly traded, private and tax exempt entities, many of which have never had a defined benefit retirement or which now have either terminated or frozen it or contemplated doing so.  This analysis provides, on a sample or actual employee basis, a projection of sources of retirement income from all sources, including Social Security.

What about executives and key employees? Because Social Security and, in many cases, pension regulations limit or cap benefits for more highly paid employees, shortfalls in replacing working income at retirement often are dramatically greater than for other employees.  While it is possible, even common in some industries, to provide supplemental, non-qualified retirement benefits to executives, prudent practice, reinforced by the current climate of outrage over perceived excesses in executive compensation, encourage third-party validation of both the size of any shortfall being addressed by such a plan and a cogent explanation of how it fits with an overall compensation policy.  Decision-makers on the Board or Compensation Committee must be confident that choices are made on an informed basis.

Check back with Winning with Titan and http://www.TitanHR.com for more on Executive Compensation issues and updates from Bob Musick, Jr. and Richard Deutsch, Titan Group’s in-house Executive Compensation experts!