It's safe to say that few 401(k) plan participants likely understand how their account balance will translate into a monthly income once they retire.
But recently proposed legislation aims to change that. The Lifetime Income Disclosure Act, introduced last December by Senators Jeff Bingaman (D-N.M.), Johnny Isakson (R-Ga.) and Herb Kohl (D-Wis.), would amend ERISA to require sponsors of 401(k) plans to inform workers of the projected monthly income they could expect at retirement based on their current account balance.
The measure is patterned after the Social Security Administration's annual statements, which are mailed to American workers to inform them of their estimated monthly Social Security benefits based on their current earnings. The senators hope that by providing similar information for 401(k) plans, participants in these plans will have a more realistic picture of their projected income in retirement.
In announcing the legislation, Bingaman said, "Our bill is a common-sense approach to empowering Americans and helping them determine whether they are on a path to a secure retirement."
The proposal already has received the thumbs-up from AARP, the Women's Institute for a Secure Retirement and the Retirement Security Project.
"Sometimes a simple common-sense change has the biggest effect," says David John, senior research fellow at the Heritage Foundation and principal of the Retirement Security Project. "Including disclosure of how much monthly income a worker can expect from 401(k) savings will encourage younger workers to save more for retirement and older ones to convert their savings into annuity-like products so that they won't outlive their savings. The Act will build greater retirement security for everyone at virtually no cost to the taxpayers, employers or workers."
But critics say it's uncertain whether these projections will actually help 401(k) plan members paint a more realistic picture of their retirement future, pointing to issues with everything from which assumptions to use in calculating the projections to who will pay to produce the calculations to the inevitable challenges of communicating the projections to employees.
"The Senate bill is just a Band-Aid. Most people don't even understand the Social Security system ... and [legislators] want to propose legislation that is going to mimic a statement that's already not understood? Is that going to solve anything? Absolutely not," says Patrick Selway, executive director of consulting with Retirement Benefits Consulting.
A big concern is the assumptions used to calculate such projections. "The issue around these kinds of projections is how do you do a projection with the proper disclaimers that makes sense?" says David Wray, president of the Profit Sharing/401(k) Council of America. "Right now if you did these projections, they wouldn't look very attractive because we're in a 1% interest-rate environment. If we were in a 6% interest-rate environment, your dollars would buy significantly more income."
Plus, employers are not in the mood for more mandates, cautions Wray. "Clearly people need to have targets, but our view is we ought not have laws that require this. Let the marketplace work this out the way it is now," he says.
While probably no one would argue that it's a good idea to try to educate plan members on how their account balance will translate into a retirement income, the devil is in the details.
"I think [the Senate proposal] is potentially dangerous because it can give people a false sense of security or, on the flip side, maybe an unjustified sense of desperation," says Steven Dimitriou, managing partner with Mayflower Advisors. "Maybe it's based on a 6% rate of return, yet the person is sitting all in money market [funds] so they're never going to reach that. Or they're invested aggressively. That projection has nothing to do with the reality of their investments."
David Snetro, senior vice-president for retirement plan services with RDM Financial Group, notes that when you're dealing with equity markets, any kind of projection is difficult. "It's dangerous to say future performance is based on past performance," he says. "It's one thing to talk about fixed income projections but once you get involved in equity-based markets, who could predict the 37% declines we had in 2008? It's a dangerous, slippery slope."
Projections are out there
Some 401(k) plan providers already offer these types of projections and have been doing so for years. "We think it's a very good thing for people to understand the amount of money they need to save and then what type of income they can convert that to over a period of time," says Luke Vandermillen, vice president with Principal Financial Group. "We've provided that type of information, converting your 401(k) balance to a monthly income, to participants for many years."
Anything that keeps employees focused on the idea of income in retirement and the need to build for that while they're working is beneficial, says Douglas Dubitsky, vice president, product management and development, retirement solutions, with Guardian. "As long as it's a level playing field, and [we get] enough lead time to get it done, I don't think there's a problem [with the Senate proposal]. I think it's very important to make people understand the idea of their retirement plan translating into income."
Anyone who has engaged meaningfully in any kind of retirement planning exercise could calculate their own projection, says Bill Daniels, a leader with Towers Watson's retirement line of business. "It's certainly not a hard number to calculate.
The investment houses all have the profit margins to comfortably do it. I don't see it as a major imposition," he maintains. Still, "even if it only costs a few pennies, what use would it be? I'm afraid this proposal, where you just get another piece of detached information, would not be useful."
What would be more useful for plan members, says Daniels, is a more integrated communications approach that would give employees an idea of when they might be able to retire, given what they've saved. "Say to someone, 'Given what you've saved, you can retire at this age.' Now you might have something that people can relate to. That given age might be more or less than what you'd hoped for, so you might be moved to do something different."
Having quickly read the proposal, "I think it's written to be fairly general to give people some flexibility in how they present this material, and it is also designed to provide some of the assumptions they would need," says Bill McClain, a principal with Mercer. "That's a positive. I think it might be a challenge for smaller employers, smaller plans, that don't necessarily have the resources to do some of these things."
It's all in the communication
However such 401(k) projections are presented, the need for clear communication to employees is great. "You absolutely must make sure that employees are not reading guarantees into any communication," says Wray. "These are defined contribution plans. By their nature, there is really no guaranteed income. And you don't want employees to think that there is."
Plan sponsors would have to be very clear about communicating that any 401(k) projection is not the same as a Social Security statement, warns Ruth Hunt, principal with Buck Consultants.
"That [Social Security statement] is a different projection than this kind of projection, where there will be many assumptions and caveats. And the more you caveat it, will it reduce the credibility of it?" she says. "Will that piece of paper be as meaningful as we might've hoped because of that credibility? Only if we really educate people and get them in the game. A statement in and of itself is going to need a lot of surrounding education."
Vandermillen agrees. "It's all in the way you present the information," he says. "You have to make several assumptions about the amount of your contributions and your rate of return. Make your assumptions reasonable. It's not a one-time piece of information. If communicated properly, you avoid the situation of someone saying it's a guarantee."
Another concern with the Senate proposal is who pays for it. If the plan is absorbing the cost, then the participant is "absolutely absorbing the cost in paying for it," notes Sandra Pappa, principal with Buck Consultants.
"It's similar to proposals out there that aim to increase disclosure on fees," says McClain. "The irony of it is that if those requirements are really complex, they run the risk of actually increasing the cost of administering these plans. So the attempt to make these more transparent could actually increase fees. All of these initiatives have to be mindful of the administrative burden and try to figure out a way to do it so it doesn't create an undue burden."
Getting your account balance via text
Getting employees to care about retirement planning is cited time and time again as one of the biggest communications challenges for 401(k) plan sponsors. However, is there an app for that?
Principal Financial Group launched a text messaging service last year where participants who sign up receive a weekly text message or e-mail with their refreshed account balance and their personalized rate of return. The firm also created a gadget for participants' i-Google home page that populates their 401(k) account balance, so that when they sign on to their i-Google page, they'll see their account balance right there.
"We're giving participants information how they want it and when they want it, as opposed to waiting for the mail to show up with their paper statement," says Luke Vandermillen, vice president with Principal.
Retirement, health care converge
Retirement and health care communications are rapidly converging, in part because of imminent regulation across both fields and a growing recognition of the impact of increased longevity. Savvy employers will work to weave health care messages into their retirement plan communications, say experts.
"The good news is you're living longer. The bad news is you need more money because you're living longer," says Steven Vernon, president, Rest of Life Communications. "That's where the [retirement and health] messages really dovetail."
Since employers are increasingly getting out of the post-retirement health benefits game, employees have reason to be concerned. Employees often think their expenses will be lower in retirement, when in fact they're sometimes equal.
"One of the most alarming things that became apparent to me as a participant and a consumer in looking at the shift is that my mortgage payment preretirement would basically then become my health care payment once I retired," says Sandra Pappa, a principal with Buck Consultants. "Making that apparent to employees is a real eye-popping wake-up call."
The old rule of needing 60% to 70% of your annual preretirement income to live comfortably in retirement is no longer the case. "Today the rules of thumb are much higher, and it is in large part because of the health care side of the equation," says Ruth Hunt of Buck Consultants.
The good news is that "traditional vendors increasingly are touting they don't just do retirement education. They're also weaving in health care education," notes Hunt. "And I think that's evidence of the demand employers are starting to get relative to what their employees need."
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