While governments and financial institutions work to achieve long-term stability, the unstable economic landscape threatens to significantly reduce the working population's retirement income and assets. The Income Replacement Ratio (IRR), supported by data analytics, is becoming an important factor in structuring future retirement products and helping more plan participants achieve their retirement goals.

1. Income Replacement and Data Analytics:
Retirement Planning for the Future
Retirement plans based on the income replacement ratio can mitigate
the looming depletion of the current working population’s retirement
income and assets.
Executive Summary
Over the past two decades, economies around
the world have experienced cycles of instability —
leading to significant depletion of nations’ wealth
and hence the wealth of their citizens. Today,
governments and financial institutions across
the globe are focusing their efforts on achieving
long-term stability. Yet ongoing economic turmoil
has highlighted the possibility of significant
reductions in retirement income and assets for
today’s working population.
Our analysis indicates that the income replace-
ment ratio (IRR) is becoming a key factor in struc-
turing future retirement products. This paper
explains the benefits of IRR-based plans, and
examines how retirement product administrators
and sponsors should look at various economic
factors and mine data to predict the best IRR for
the population segment they serve.
The Specter of Uncertainty
If Social Security, pensions and savings fail to
provide adequate retirement income, the health
and well-being of the elderly will be at risk.
Given the change from the defined benefit to the
defined contribution retirement model in recent
years, employers need to reexamine plan struc-
tures to better meet their employees’ retirement
goals.
A major concern in the retirement industry is how
long retirement programs such as Social Security
and Medicare can be sustained. Based on recent
studies, the Social Security benefits paid out will
outstrip the Old-Age, Survivors and Disability
Insurance (OASDI) Trust Fund tax receipts and
other income by 2036 — forcing a reduction in
Social Security benefits.
It is evident that plan sponsors need to proactively
address these challenges. One area that sponsors
and record-keepers can focus on is maximizing
the benefits of 401K plans to compensate for
any loss or reduction of Social Security benefits
for employees. Employees also need to consider
a potential loss of Social Security benefits when
planning for their retirement.
One widely used measure of retirement income
adequacy is the replacement ratio, which
expresses retirement income as a percentage of
pre-retirement income.
• Cognizant 20-20 Insights
cognizant 20-20 insights | january 2014

2. 2
Income Replacement Ratio
The income replacement ratio (IRR) is the amount
of income needed post-retirement to maintain the
plan participant’s standard of living pre-retire-
ment. The formula to compute the IRR is:
IRR = Post-Retirement Income/
Pre-Retirement Income
Post Retirement Income =
(PR Income — PR Tax — PR Savings — PR Misc.
Expenses + Age Related Expenses +
Post Retirement Tax).
PR stands for Pre-Retirement.
The IRR typically ranges from 65% to 90%. It is
usually less than 100% because both taxes and
savings generally decline post-retirement. Work-
related expenses, mortgages and the cost of
supporting a family also tend to be taken care
of before retirement. At the same time, higher
medical costs and additional leisure expenses
usually become more important considerations
for retirees.
IRR Need Analysis
Understanding the factors that impact IRR
requirements can help plan sponsors, record-
keepers and participants deepen their insights and
maximize the benefits of IRR-based retirement
goals. According to our analysis, the key factors
affecting the IRR are plan participants’ household
income, family status, educational attainment,
outside assets and retirement age. To arrive at the
“IRR need,” plan sponsors should analyze their
employee population and group individuals based
on those four key factors, which we have termed
“input parameters.” (See Figure 1).
The data collected on all employees should then
be fed into the IRR need Analysis Methodology
framework. A combination of different values of
the input parameters will result in different IRR
needs. However, not all input parameters will
have the same impact on the IRR need. We have
assigned different weightages to the input param-
eters (see Figure 1) depending on their potential
impact on the IRR need.
IRR need determines the extent of income
replacement required for plan participants post-
retirement.
The data analysis includes assigning an IRR need
score to each participant based on the impact of
the input parameter on the IRR and the weightage
of the input parameter. The total score for each
participant will determine their IRR need.
Based on the analysis of the IRR score, par-
ticipants can be grouped into three categories:
High, Medium or Low. The IRR need will drive the
output parameter values for the various groups
of participants.
Output parameters are associated with retire-
ment plans offered to plan participants. Plan
sponsors can devise retirement offerings by
modifying the output parameters so that par-
ticipants will be able to meet their IRR need. For
example, retirement offerings for High IRR need
participants will have different output parameters
than those offered to participants with Low IRR
need. Following are the output parameters that
can help better define a retirement product:
• Investment option: The Investment Option
could be High, Medium or Low, based on the
growth potential of the investments. Higher
growth investments will be associated with
higher risk.
• Product features: Sponsors will have the
option of selecting appropriate product
features, such as Auto-Enrollment, Plan Match
and Auto Increase, for a group of participants
based on their IRR need.
• Retiree medical plan: Based on a participant’s
profile and the associated income replace-
ment need, sponsors can choose to provide
post-retirement medical benefits to selected
participants.
Statistical analysis can be conducted to determine
the effects of the input parameters on the IRR.
Statistical analysis tests the effects of a range of
variables, with the probability that a respondent’s
income replacement ratio will exceed the sample’s
median ratio. The independent variables in the
cognizant 20-20 insights
Figure 1
Parameter Weightage for
IRR Analysis
Input Parameters Weightage
Income 0.4
Family Status 0.3
Educational Attainment 0.1
Outside Assets 0.1
Retirement Age 0.1

3. 3cognizant 20-20 insights
statistical analysis include Income, Family Status
(marital status and number of dependents), Edu-
cational Attainment, Outside Assets and Retire-
ment Age. The analysis therefore controls the
effects of the factors mentioned in Figure 1 (see
page 2) on the replacement ratio. The results in
Figures 4, 5, 6 and 7 demonstrate the impact of
these factors on the IRR. In a study conducted by
Michigan Retirement Research Center, the median
IRR for the statistically selected sample was 68.
Leveraging the Outcome
of the Analysis
Once participants’ appropriate IRR need is estab-
lished, the next logical step for sponsors and plan
administrators will be to identify the best plan
for each participant. This will require analyzing
the performance of the existing offerings, under-
standing the participant’s current profile, and
designing/suggesting appropriate plan features.
Data Mining
Data mining processes can be used to identify par-
ticipants’ IRR need and offer customized solutions
and guidance to help participants reach their
retirement goals. Record-keepers maintain plan-
and participant-specific historical transactions
and demographic data. This information can then
be analyzed and used to draw valid conclusions.
Parameters for Effective Analysis
and Outcome
Input Parameters
IRR need
Key Parameter
Output Parameters
Determine
Guide
Devise
Create
Survey Data
Support
• Income
• Family Status
• Educational Attainment
• Outside Assets
• Investment Option
• Product Features
• Retiree Medical Plan
Customized
Retirement Offering
Plan
Participants
Plan
Sponsors
Plan
Administrators
Figure 2
Greater IRR for Low and High-
Income Groups; Lower IRR for
Medium-Income Groups
Low Medium High
Income
IRR
Figure 3
Figure 4
Illustrated Effect of Income on IRR
Income Income Replacement Rate
0-30% 0.72
30%-50% 0.59
50%-70% 0.67
70%-80% 0.68
80%-90% 0.73
90%-100% 0.76
Figure 5
Illustrated Effect of Marital
Status on IRR
Marital Status Income Replacement Rate
Married 0.75
Not Married 0.55
Figure 6
Illustrated Effect of Number of
Dependents on IRR
Number of
Dependents
Income Replacement Rate
0 0.47
1 0.70
2 0.74
3 0.70

4. cognizant 20-20 insights 4
Plan sponsors can conduct surveys for all plan
participants to gather certain demographic data
and other relevant information. This data can
then be examined to customize the retirement
offering. Participants can be offered plan features
based on their household income, educational
qualification, marital status, number of children,
etc. Marketing communications to plan partici-
pants can be tailored to encourage more engage-
ment, active involvement, and use of the various
features and benefits of the plan. Targeted invest-
ment advice highlighting high-yielding investment
options can also be sent to participants. Plan
features that will drive plan performance and par-
ticipation rates can be identified by analyzing his-
torical data — helping to improve future offerings.
Participants’ medical claims data can be analyzed
to tailor healthcare plans and encourage
employees to adopt healthier habits. By identi-
fying gaps in medical treatment, employers can
help participants seek the proper care to prevent
major healthcare costs. Specialized plans with
customized features can be offered to partici-
pants to persuade them to remain with an orga-
nization.
To accelerate an offering’s time to market, plan
sponsors and administrators can consult with
third-party service providers with relevant expe-
rience in the retirement domain and capabili-
ties in data analytics. The service provider can
work closely with administrators and sponsors
to collect the data required for the research and
accurately profile participants.
Conclusion
Plan participation rates and income replacement
are key to measuring a retirement plan’s perfor-
mance. Each participant’s IRR need is different,
and based on factors such as household income,
educational qualification and marital status,
for example. Plan sponsors and record-keepers
should determine a plan participant’s IRR need by
analyzing participant and plan-level data. This will
help sponsors customize retirement offerings to
help more plan participants achieve their retire-
ment goals.
Participants’ data from the record-keeper and
data collected through surveys should be mined
for actionable information. Thorough analysis of
participant data can provide insights that can be
used to help make better decisions, such as deter-
Educational Attainment
Income
Replacement Rate
Less than High School 0.57
High School Graduate 0.64
Some College 0.71
College and above 0.90
Figure 7
Illustrated Effect of Educational
Attainment on IRR
The Role of Stakeholders in the Retirement Planning Process
Plan
Sponsors
Plan
Administrators
• Understanding of post-retirement income replacement need.
• Understanding factors impacting income replacement.
• Identify IRR need for plan participants.
• Customize retirement offering.
• Offer customizable retirement products to sponsors based
on participants’ IRR need.
• Provide investment advice based on participants’ IRR need.
Plan
Participants
Figure 8

5. cognizant 20-20 insights 5
mining the offering that will be the best fit for the
participant. Products’ features can be designed
based on analysis of the data. (See Figure 9).
Plan sponsors should educate all employees
about their IRR need and devise actionable strat-
egies for improving plan participation rates. At
the same time, retirement-planning companies
need to help their end customers better predict
and plan for their future financial needs. Robust
data analytics can help organizations assure more
effective retirement planning and stay ahead of
the game in the next decade.
Data Mining Components and Benefits
Industry
Data
Encourage long and loyal employee service.
Customized communication.
Improve returns on the investments.
Product features vs. plan performance.
Plan fee management.
Tailor healthcare plans.
Analysis based on combination
of domain knowledge and
statistical techniques.
Outcome of analysis for
actionable information.
Transactional
Data
Demographic
Data
Figure 9
References
• Calculating Your Replacement Ratio. http://www.smart401k.com/Content/Education/Smart401k/
Home/retirement-strategy/calculate-replacement-ratio.aspx.
• Income Replacement Ratios in Health and Retirement Study.
http://www.ssa.gov/policy/docs/ssb/v72n3/v72n3p37.html.
• Allen, Earle. Secret to a 401(K) Plan’s Success: The Income Replacement Ratio.
http://www.shrm.org/hrdisciplines/benefits/articles/pages/replacementratio.aspx.
• Hewitt, AON. 2012 Hot Topics in Retirement. http://www.aon.com/attachments/human-capital-con-
sulting/2012_Hot_Topics_in_Retirement_highlights.pdf.
• Scholz, John Carl and Ananth Seshadri. What Replacement Rates Should Households Use?
http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp214.pdf.
• Principal Financial Group. Participant Savings Rates and Income Replacement Ratio. http://www.
principal.com/businesses/planningcenter/employeebenefits/bestpractices/savings-rates-income-
replace-ratios.htm.
• Jack VanDerhei, Temple University and EBRI Fellow. Measuring Retirement Income Adequacy:
Calculating Realistic Income Replacement Rates. http://www.researchgate.net/publication/6778381_
Measuring_retirement_income_adequacy_calculating_realistic_income_replacement_rates.
• Cognizant Business Consulting. IRR Need Analysis Methodology.

6. About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
delivery centers worldwide and approximately 171,400 employees as of December 31, 2013, Cognizant is a member of
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and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.
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About the Authors
Krishnendu Saha is a Senior Consultant with Cognizant Business Consulting’s Banking and Financial
Services Practice. Krishnendu has more than nine years of experience in leading business and IT engage-
ments, primarily in the benefits administration and capital markets domains. He can be reached at
Krishnendu.Saha@cognizant.com.
Nishant Dev Arya is a Senior Consultant with Cognizant Business Consulting’s Banking and Financial
Services Practice. Nishant has more than nine years of experience in leading business and IT engage-
ments, primarily in the Cards and Payments and Asset Management domains. He can be reached at
Nishant.Dev@cognizant.com.
Jay Das is a Senior Manager with Cognizant Business Consulting’s Banking and Financial Services Practice.
Jay has 13 years of experience in sectors such as oil and gas, BPO, retail banking, asset and wealth
management, and risk management and compliance in financial services in both emerging markets and in
the U.S. In financial services, Jay has worked on several consulting engagements at diversified asset and
wealth management organizations in the U.S. He can be reached at Jayanta.Das2@cognizant.com.
Glossary
Plan sponsor: The plan sponsor is a designated party – usually a company or employer – that sets up a
healthcare or retirement plan for the benefit of the organization’s employees. The responsibilities of the
plan sponsor include determining membership parameters, selecting investment choices and, in some
cases, providing contribution payments in the form of cash and/or stock.
Plan administrator: The plan administrator ensures that money is being contributed to the fund, that
the proper asset allocation decisions are made, and that payouts are promptly distributed among all
qualified plan participants or beneficiaries.
Plan participant: A plan participant either contributes to a pension plan or is in a position to receive
benefit payments from the plan. Plan participants can include a retired person receiving distributions
from a pension plan, a beneficiary, or a dependent named by a contributing member.
Auto-enroll: This is the process of automatically enrolling participants in the plan, unless they choose
not to participate.
Plan match: This involves the employer matching some pre-defined part of the employee’s contribution
to the retirement plan.
Auto-increase: This is the process of automatically increasing the participant’s contribution by a pre-
defined value every year.