Monthly Income Projections: A Well-Intentioned Idea

The Department of Labor’s (DOL’s) proposal to include monthly income projections on retirement plan participants’ statements is a well-intentioned idea that may have unintended consequences.

By editors@strategic-i.com | July 09, 2013
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Under proposed regulations, participant statements will have to include projections of: 

·        Account balance at retirement age, based on current savings rates, and  

·        The monthly income that amount of savings could generate over an expected lifespan.    

 

It is intended as a wake-up call to plan participants to increase their savings rate to a level that will generate an adequate amount of monthly retirement income.  It’s a nice concept, but we fear the DOL’s safe harbor methodology used in the projections could lead to large numbers of participants getting lulled into false complacency, or even worse, being provoked to drop out because they become demoralized.  Here’s what we are concerned about: 

Accumulation:  The safe harbor method uses a 7% rate of return.  However, there are many risk-adverse participants who gravitate toward stable value or money market.  These certainly include older participants, but data is showing us that many members of “Gen Y” are joining them in their plans’ zero-volatility options.  If those options are returning 2%, and if their balance growth is being projected out at 7%, the DoL projections are going to tell them they are in much better shape than they actually are.    

The other issue with the accumulation projections is that they are based on an assumed savings rate.  How will this number be derived?  Many participants have a level savings rate throughout the year, and from year-to-year.  However, many don’t.  Some max out early in the year and then save nothing for the rest of the year, and others save nothing until their year-end bonuses get paid.  If a non-representative savings number gets into the calculation, it can lead to very misleading results, one way or the other.