Tools take guesswork out of retiree planning

A growing number of employers with defined benefit plans are considering implementing sophisticated Internet-based tools to encourage workers to plan for their retirement. Companies hope the newer pension calculators and related online tools will engage many employees who are still procrastinating when it comes to retirement planning.

Fifty-eight percent of employees polled for the Washington-based Employee Benefit Research Institute's "2006 Retirement Confidence Survey" said neither they nor their spouse calculated how much money they need to live comfortably in retirement. Of those who did calculate retirement needs, 8% said they arrived at an answer by guessing.

Yet, according to a recent unpublished survey by Towers Perrin, about 60% of employees say they have online retirement planning tools available to them, said Ginny Olson, a principal with the consultant in Atlanta.

A majority of employees in the EBRI survey reported that they did not find the tools especially useful. Asked what sources of information they found "most helpful" in planning for retirement, only 5% of employees in the EBRI survey identified the Internet and fewer than 2% said online tools. Instead, employees relied more on advice from a professional, written material from an employer and advice from family and friends.

That picture may change as more employers make better tools available. Companies that have introduced next-generation pension planning tools--including Northeast Utilities Service Co. in Hartford, Conn., and Public Service Enterprise Group Inc. in Newark, N.J.--report the tools are very popular.

Evolving from generic Web sites that offered simple pension estimates, sophisticated tools bring personalized information onto an employee's computer screen and paint a total retirement picture, allowing a worker to model scenarios side-by-side for retiring at different ages. The tools can show an employee's pension benefit and factor in a spouse's 401(k), an annuity, Social Security income and the possibility that the employee will sell a house and move into a condominium, said Tony DeNucci, national leader, pension administration systems at Watson Wyatt Worldwide in Minneapolis.

PSEG's pension calculator also can model the effect on retirement of variables including anticipated raises and bonuses and different contribution levels to a 401(k) plan, said Charles Miracola, manager of corporate benefits in Audubon, N.J.

And that's not all. "Our clients are asking for tools that not only show retirement income but also health care expenses," said Scot Marcotte, principal, electronic communications with Buck Consultants L.L.C. in Chicago. An employee retiring at age 65 could face an estimated $200,000 in health care expenses during the rest of his or her life, he said.

To help workers plan for those expenses, PSEG's retirement tool links to a benefits estimator that calculates how contributions to a tax-free medical expense account will accumulate to pay for medical expenses at retirement, said Mr. Miracola.

On the other hand, Mr. Marcotte said, "an employee can load up on one (long-term) savings device only to find out he missed out in the short-term," for example, by not putting money in a company stock ownership plan. Tools should help an employee decide money placement "for the smartest possible future," he said.

Tools are moving in the direction of helping employees understand "the investment mix question," added Ms. Olson. Tools help with questions such as whether the employee is willing to take on more risk and where that will get him or her in retirement, she said.

"The art is making the tools comprehensive and easy to use," Watson Wyatt's Mr. DeNucci said. An employee should be able to get an answer to a retirement question at the bottom of the first screen. Employees can become discouraged if they have to plow through five screens to get an answer, Mr. DeNucci said.

PSEG has had a retirement modeling tool "for quite a number of years," Mr. Miracola said. As the tool has become more comprehensive and graphic, "by now for most people it's second nature" to use it. "Some people check their 401(k) balance literally every day," he said.

Northeast Utilities introduced an Internet-based pension calculator about five years ago, said Jean-Claude Bazelais, human resources director-benefits. "It's a very, very popular tool," particularly because the average age of employees is 48 with 20 years of service. "Before we introduced the pension calculator, we were bombarded with requests for estimates" of pension amounts, he said.

Two-thirds of the company's 6,000 workers are professional and technical employees and most of the professional employees use the tool, Mr. Bazelais said. The company's objective is for the majority of its workers to use the tool. But he said, "Remember, this is a long journey."

Employers and consultants say companies find online tools particularly useful when introducing benefit plan changes. For example, last year, while Northeast Utilities introduced a defined contribution plan for its new employees, most employees remain in the defined benefit plan. "We're making sure people know about their future needs and are educating them" by offering the tool and through a partnership with a financial planning firm that offers a free financial planning seminar. Employees also are offered vouchers to consult with a financial adviser.

PSEG set up an additional calculator for employees when on July 1 it changed the contribution for retirees from medical only to one for medical and dental.

Even the best tools have to be proactively marketed, consultants and employers say.

"When it's well-marketed and offers personalization and good decision support, usage often is up in the 60 to 70% range," Mr. Marcotte said. "If it's poorly marketed or it's just a simple tool, that number could be 20%."

As more employees use the tools, employers find they are saving time through a reduction in phone inquiries about pension benefits.

"But we didn't do it to save money," Northeast Utilities' Mr. Bazelais said. "What we want is for employees to appreciate the value of the benefits."

"When you get to an employee population that's better prepared for retirement," Mr. Marcotte said, "that takes their minds off financial needs so they can focus on business concerns."

The EBRI and Towers Perrin surveys indicate that lower-income workers make less use of the online tools than higher-paid employees, and surveys, including the Pew Internet and American Life Project, have correlated Internet use with higher income and education. "It's a very clear picture," said Ms. Olson, and suggests that employers with large, lower-paid workforces "need to be thinking of whether they need to be focusing on offering tools or actual people to help their employees plan for retirement."