Here’s one riddle:
How much do you need to retire? The answer depends on a lot of things like: when you plan to retire, how many sources of retirement income you have, whether or not you will have health insurance when you retire, whether you have long term care insurance, where you live and many, many other factors that may change between now and when you retire. Usually retirement services companies provide participants in their plans with retirement planning tools that enable multiple scenarios to be analyzed under different interest rate and investment risk scenarios. They typically use something called Monte Carlo Simulation to run thousands of iterations of the model to develop high statistical confidence of a particular result.
Here’s another riddle:
Why is the Department of Labor (DOL) trying to get retirement services providers to try to convey such complex information on the participant statement? This week, the DOL’s Employee Benefits Security Association gave advanced notice of proposed rulemaking that would require Defined Contribution (DC) participant statements to convert account balances into a stream of monthly income. Ouch.
I’m with the DOL on the idea of providing better retirement income information, but isn’t this likely to create more confusion? Also, if participants think that they have the answer to riddle number one on their statements will they bother to use the extensive and sophisticated retirement planning tools that retirement services providers have made available to them?
Riddle number three:
If this information does need to be shown on the statements what assumptions will be used? Will calculations start with a current balance and make projections? Will they make assumptions on increases in contributions or salary to estimate a future balance? What retirement age will be assumed? Will all of the assumptions need to be explained on the statement (yes) and if so, are there enough trees currently planted to support the legal disclaimers? With or without disclaimers, some participants will construe the income stream projections as guaranteed income.
The DOL EBSA notice suggests a calculator and certain assumptions, but also says that providers can make their own calculations: “The general rule being considered by the Department is that projections shall be based on reasonable assumptions taking into account generally accepted investment theories.” Generally accepted investment theories? Really? That’s helpful. Instructions for converting the balance into an income stream are even more problematic but more than I will bend your ear with today.
If this rule is enacted in some form – and given the current appetite for messing with the retirement industry right now it probably will – the industry will be in for some major systems overhauls at substantial cost. Printed and online statements will need to be redesigned and, companies will need to ensure that they maintain a level of consistency with other retirement planning tools while trying to come up with something that can reasonably be portrayed on a quarterly statement.
The notice was published on the Federal Register May 8th and comments on the proposal may be submitted within a 60-day window. I think there will be more than a few.