It’s great to see Congress and regulatory agencies taking an interest in promoting and encouraging greater access to lifetime income projections in 401(k)s and other retirement plans. That such projections should be mandated as a one-size-fits-all solution is not.
In the past decade, some retirement plan providers have taken the bold step of offering lifetime income projections that take into account a worker’s age, salary, savings rates and other factors that allow employees to see today what their potential monthly income might be in retirement. This has been a tremendous advancement for retirement savers.
Congress is now considering a provision in both the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Retirement Enhancement and Savings Act (RESA) of 2019 that would require 401(k) providers to convert a client’s current balance into a projected monthly income amount for their retirement years.
The creation of one simple calculation that would be applied uniformly to all retirement savings plans would not be effective. A simple calculation could not, by its very nature, take into consideration all of the variables that make these tools effective.
In addition, the proposals as currently written are unclear on the details of what this mandate will entail and what inputs and assumptions will be allowable when presenting a lifetime income projection to an individual.
The provision should be modified. Lifetime income projections need to breathe and evolve with technology and be able to adjust to modern plans designed by providers that take into account many variables, large data sets and sophisticated algorithms.
Going forward, it is imperative that any government action provide flexibility to allow lifetime income projections to continue to evolve and give American workers a better picture of where they are going and how to get to their retirement years.
Companies that offer workplace retirement savings plans must feel free to offer projection models that go beyond a simple calculation. And employers must be able to offer their workers access to more robust and effective tools without fear of liability.
According to Empower Retirement research, on average, individuals who are exposed to a projected view of their future monthly income increased their expected income replacement rates in retirement.
The study shows that individuals’ projected income replacement scores in their plans rose from 65% to 78%, or 20%, on average, over a six-year period. Over a similar time period, American workers, on average, were seeing static projected income replacement levels at a household level with projected income replacement rates holding fairly constant between 61% and 64%.
The retirement services industry is by no means complacent. Along with our adviser partners, there is widespread belief across the industry that there are always opportunities for improvement. We regularly seek ways to work with polic ymakers, share our learnings and help craft policies that are most effective for Americans saving for retirement.
As that great American philosopher Yogi Berra put it, “If you don’t know where you’re going, you might wind up someplace else.”
At the end of their journey to retirement, workers should arrive at the destination they planned with the security they deserve. This is important. We must work together to get this right.