Could a retirement plan report push employees to save?
Many industry insiders believe retirement outcomes would improve more quickly if defined contribution plan participants had a quick and easy way to figure out how their retirement account balance would translate into income in their post-work years.
A number of proposals have been floated in Congress over the years, attempting to mandate lifetime income reports on retirement account statements, but to-date, none have gone anywhere.
Bob Collie, chief research strategist, Americas Institutional, at Russell Investments, says that he has wanted something like this for defined contribution plan participants for years, ever since it became clear that defined benefit pension plans were going away and defined contribution plans were becoming the primary retirement savings vehicle for most people.
Over the years, the industry has attempted to convert defined contribution plans into something that resembles defined benefit plans. Companies have adopted automatic features like auto-enrollment and auto-escalation to take some of that decision making out of the hands of people who are ill-equipped to make investment decisions.
Collie points out that defined contribution plans like 401(k) and 403(b) plans were never designed to be the primary retirement account for anybody. They were designed as supplemental plans; an additional pool of funds people could tap into during their retirement years.
The Lifetime Income Disclosure Act, a bill introduced in the Senate this month by Sen. Johnny Isakson, R-Ga., and Sen. Christopher Murphy, D-Conn., would require retirement plans to include a lifetime income disclosure on one pension benefit statement a year. Based on the person’s account balance, the plan would include an estimate of what that person could take out each month during retirement.
Lee Covington, senior vice president and general counsel for the Insured Retirement Institute, says that his organization supports the Lifetime Income Disclosure Act.
“This legislation would require employers to put an estimate of the monthly lifetime income they would receive based on their accumulated savings,” he says. “A lot look at their account balance and think that is a lot of money, but when they translate that into monthly income it highlights the fact they need to save more.”
IRI’s research has found that people do want this information and believe it would be helpful to them. A recent survey found that 75% of respondents would increase their savings by 4 to 7 percentage points if they had this information, “which is significant,” Covington says. “They take positive action when they see this information.”
Collie says he is in favor of the measure because “first of all it has bipartisan support,” which is hard to do in a time where hardly anyone is crossing the aisle to work with anyone of the opposing political party. It also is simple enough that it could easily make its way into another larger piece of legislation that would help it pass.
“There are no guarantees,” Collie says. “This is not high enough on anyone’s agenda to push it through. It is more of a question does it find a way on the coattails of another initiative?”
The bill’s sponsors hope that having such a statement of monthly retirement income will spur plan participants to change their savings behavior.
“Reporting doesn’t directly impact how someone will see that savings and how much they choose to save,” he adds. Instead, it shines a light on how much income it takes to provide additional funds throughout life.
Opponents of the concept believe lifetime income reporting would discourage people from saving more for retirement because they will feel like there is no way they can save enough to build up that balance, but Collie says he believes it will encourage people to save more.
“The reality is it is very expensive to save for retirement. People are living longer than ever and if people are looking for enough money to live off of for 25 or 30 years, it is going to take a lot of saving. It is not as if Social Security is going to provide a good base for most people in terms of their expectations,” he adds.
Since defined contribution plans are what most people have access to, that is what the industry’s focus should be on, but if there is not enough money going into the system, it won’t generate enough income in retirement, he says.
Many differ on how those retirement income totals should be calculated. Collie argues for a standardized approach that bases its estimates on the current cost of purchasing an annuity. The criticism of that approach is that it takes into account today’s rates as an implication of what might exist in the future, he says.
“It is important for the calculation to be simple and standardized so we are not putting the burden on people to make best estimates around things,” Collie says. It shows plan participants that in today’s annuity market, this is what their account balance would buy.