Exposing the retirement income myths between plan sponsors and employees

Key takeaways:

• Employers and workers are often misaligned on retirement readiness and income needs.
• You can bridge these gaps with targeted education and innovative plan design, such as in-plan lifetime income solutions, which help employees convert savings into reliable retirement income.

02/18/2025 — While employers strive to understand and support their workforce’s financial needs, natural gaps can sometimes emerge between organizational resources and employee expectations. These gaps often extend to benefits packages. A 2023 study from Aflac found that while about 80% of employers believed their benefits offerings met employee needs, only 59% of workers agreed.  

Recent research from the Nationwide Retirement Institute further highlighted these discrepancies in the arena of retirement planning, revealing that employers and their workers often view retirement readiness through different lenses. The research identified four key perception gaps that companies should address to create a more supportive and effective retirement planning environment. 

Perception Gap #1:

Employees and employers share the same expectations regarding the timeline for retirement.

Reality:

Employees plan to retire later than employers anticipate.

Most employees expect to retire at the age of 65. However, plan sponsors report that the average age of retirement for their workforce is four years sooner at 61. This also aligns with Employee Benefit Research Institute research showing that 6 in 10 retirees leave the workforce earlier than planned, often due to factors out of their control.

By encouraging the use of retirement tools and online calculators, commonly provided to participants by retirement plan recordkeepers, employers can help ensure both parties have a clearer, more realistic understanding of when employees may be ready for retirement. Driving greater use of these resources may help employees have a better view of steps they can take to accelerate their pace to retirement or at least reduce chances that they miss easy opportunities to prepare for a retirement that could come sooner than expected. 

In my experience, one of the key reasons employees feel they need to work longer is fear of outliving their savings, which aligns well with other perception gaps we observed in our study. 

Perception Gap #2:

Employees think about their retirement accounts as a savings vehicle.

Reality:

Employees are thinking about their 401k as a comprehensive tool to help prepare for and live in retirement. 

A majority of employees are viewing their retirement goals in terms of a monthly income target rather than a target lump sum they need to reach, an encouraging shift in perspective that reflects a more practical approach to retirement planning. 

Employers can support this mindset by providing access to personalized financial resources, like budgeting or debt management tools, and professional advice to help them optimize their strategies for reaching their income targets. 

Perception Gap #3:

Employees have a firm understanding of their retirement income needs.

Reality:

Employees aren’t as knowledgeable as employers think they are about retirement income needs. 

Even though employees are focused on income targets in their planning, most struggle with understanding how much income they’ll actually need to achieve the lifestyle they want in retirement. Employers tend to also overestimate workers’ confidence here: approximately half believe their workforce is aware of how much income they’ll need in retirement, yet only 27% of workers actually feel knowledgeable on this important topic. 

Many workers also overestimate the amount they can safely withdraw each year without running out of savings – 63% believe they can withdraw 5% or more per year, overshooting commonly held rules of thumb designed to help retirement savers avoid outliving their savings. 

These disconnects suggest employees could use more help with understanding how to translate their savings into income they can rely upon in retirement – regardless of how long they live. Employers can assist by providing targeted education and resources, or by incorporating retirement income offerings within their plans that simplify the process for employees.   

Perception Gap #4:

Employees are satisfied with the retirement plan investment options provided by their employer. 

Reality:

Employers overestimate the satisfaction employees have with the investment options available to them. 

Nationwide’s study echoed the Aflac research, finding that 86% of plan sponsors think employees are satisfied with the retirement offerings available to them, but only 62% of employees agree with that sentiment. This trend, consistent in our research since 2021, underscores the need for employers to solicit regular feedback on benefit offerings from their workforce and consider new solutions that can help fill potential gaps. 

So, what more do participants want from employers? Whether we’re talking about when employees will feel confident enough to retire, how much income they will need, how their savings will translate to income or how investment offerings can better meet their needs – these perception gaps ladder up to a clear theme: employees are seeking more opportunities to ensure reliable income in retirement.

Our survey results show their top hurdles are understanding how long their savings will last and the impact of rising costs. Additionally, 73% of workers want an automatic way to convert savings into retirement income. Lifetime income solutions, like Nationwide’s Protected Retirement offerings, address these challenges by providing a dependable income stream they can count on throughout retirement – all within their employer-sponsored retirement plan.  

Plan sponsors hold some misperceptions about protected retirement solutions

While the SECURE Act has made it easier to include lifetime income solutions within retirement plans, and many of these offerings have gained significant momentum in the marketplace, many employers remain hesitant to adopt them due to misconceptions about costs and administrative complexity. 

Nationwide’s survey also uncovered the following product myths that plan sponsors hold about these solutions:

Myth #1:

They cannot be rolled over or transferred without penalties.

• 70% of employers mistakenly think there are penalties to transfer funds from lifetime income solutions – a misperception that’s grown since 2021.
• 4 in 10 employers believe these options cannot be rolled over to another retirement plan.

The truth:

This is a common misunderstanding. The truth is that these offerings are built with adaptability in mind. Many allow participants to transfer or withdraw their funds without incurring penalties, ensuring they maintain control over their assets if their circumstances change. And if they change jobs, participants can transfer their balance to another retirement plan as long as it offers the same investment option to keep the income guarantee (or to an IRA that offers a guarantee).

Myth #2:

Lifetime income solutions offered within an employer-sponsored retirement plan are similar to solutions available outside of an employer-sponsored plan, such as a retail annuity.

• Nearly 4 in 10 employers think lifetime income solutions are the same as an individual retirement annuity. 
• 61% believe fees associated with a lifetime income solution within a retirement plan are similar to fees for such a solution offered outside of a plan, like a retail annuity. 

The truth:

While both employer-sponsored lifetime income options and retail annuities aim to provide a steady income stream in retirement, there are key differences. Employer-sponsored options are often more customized to fit the overall retirement plan and can be more cost-efficient due to economies of scale. They also tend to offer greater flexibility, with fewer penalties for early withdrawal or transfer. 

Retail annuities, while a great fit for many investors, may have higher fees and more restrictive terms. Understanding these distinctions can help plan sponsors make informed decisions about the right fit for their investment line-up.

Double click: Dive deeper into common retirement income product myths here to learn the truth about the powerful benefits they offer workers.

I believe that in the relatively near future, employer-sponsored retirement plans without lifetime income investment options will find themselves at a competitive disadvantage, which could impact businesses’ ability to recruit and retain top talent. Employees will be looking for these options when choosing where they want to build their careers. 

By bridging these perception gaps through enhanced communication, personalized resources and innovative plan design, employers can foster a retirement planning environment that truly aligns with their workforce’s needs, better supporting the long-term financial security of all employees and setting the organization up for a more engaged workforce.