Data & Research February 24, 2016

How Reliable Are Common Retirement Planning Tools?

A study finds that most retirement calculators may not be all they’re cracked up to be.
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Common retirement questions—Will I be able to retire? Do I have enough to retire? Will I run out of money in retirement?—naturally lead to one overarching question: How do I find the correct answer to these fundamental questions?

Researchers at the department of personal financial planning at Texas Tech University tested and rated the 36 most widely available retirement planning tools and found some alarming gaps.

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In 2000, according to “The Efficacy of Publically-Available Retirement Planning Tools,” an insurance company received a patent for a computer-based tool that performed financial planning calculations, primarily for retirement. The goal was to create graphical results for financial advisers in an understandable format for presentations to households. However, the paper says the tool was never intended for direct personal use by non-professionals. Yet, by 2003, there were at least 24 electronic tools for retirement analysis. Six of those tools were for public use, while 11 were for professionals, and at least two were proprietary tools. Five tools were unidentified. The number of publicly available tools has grown substantially since then.

The researchers point out that one of the drawbacks of using the dozens of available tools—many on well-known company websites—is that some households may think they are trustworthy because they come from third-party sources, or that they are cost-effective since they significantly reduce search cost.

The paper examined the variation of tool inputs and default settings to see which demographic, financial and economic inputs, including default settings, are necessary for retirement planning tools to provide an appropriate recommendation. Three important outcomes were assessed: the relevance of the advice provided to households using these tools; the potential for risk that households could face in using these tools; and suggestions for the information that developers should include in their tools to make them more accurate.

NEXT: What’s wrong with most tools?

The paper has a number of criticisms for the tools. Many fail to consider different types of decumulation options, such as the option to annuitize 401(k) plan assets. Most of the tools also do not recognize that some households prefer to retire gradually, rather than identifying a date that acts as a light switch that is instantly changed from “not retired” to “retired.” Many tools market themselves as sufficient to answer the most common retirement question (How much do I need to save for retirement?) but in fact lack critical data about income and other household assets.

Another issue has to do with conflicts of interest. Tool inputs and default settings are sometimes established, in some tools, to guide households into purchasing financial products or speaking to a financial professional who may be paid for selling proprietary products. Allowing tool providers to exploit this information can result in households viewing results as retirement advice, without understanding that the tools provide directed “advice” that benefits the vendor, not the investor.

Across the range of tools, the researchers spotted a lack of consistency in inputs and default settings, that make the tools questionable for planning and educational purposes for households, financial professionals, and academics. If households are to use these tools either for planning or educational purposes, it is clear that the tools need to offer appropriate and similar input options and default settings. 

To provide useful and more consistent planning information, the researchers recommend that tools include the following input selections:

Age:  Current age; age to retire.

Life Expectancy: Personal health; smoker vs non-smoker; family mortality history.

Income (and Expenses): Current and future annual income; pension income (government or private); social security; trust income; disability income; pre-retirement asset withdrawals; other sources of retirement income (e.g. part time work, alimony).

Expenses: Retirement living expenses (prioritized with time and dollar specificity).

Assets (and Debts): Accumulated savings and debts; taxable (e.g. cash, brokerage accounts); tax-deferred (e.g. 401k, traditional IRA); Tax-free (e.g. Roth 401k, Roth IRA, 529); mortgage details; windfall receipts; bequests.

Rates: Future return assumptions (stocks, bonds); inflation assumptions; tax assumptions.

Household Structure: State of residency; gender; marital status; goal specifics; and risk tolerance.

“The Efficacy of Publically-Available Retirement Planning Tools,” by Taft Dorman, Barry S. Mulholland and Harold Evensky of Texas Tech University and Qianwen Bi of Utah Valley University, can be downloaded free of charge.

Compliance February 24, 2016

A New Fiduciary Paradigm Before Year End?

The Department of Labor’s new fiduciary rule will be very hard to reverse once in place—even if Republicans take the White House.
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Steven Miyao is kasina’s founder and president of DST’s Distribution Solutions, “a role that involves working with the top global asset managers, insurance companies, advisers and broker/dealers on all aspects of their product strategy, distribution strategy and integration strategy.”

It’s a good position from which to observe the main trends impacting these critical sections of the investment industry, Miyao explains. “We’re integrally involved in each of our clients’ business practices, and a big part of what we do is focused on surveying advisers and distributors on the ground,” he tells PLANADVISER. “This allows us to stay on top of their needs, demands, attitudes, behaviors—all the things driving the investment industry forward.”

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Right now one clear point of focus (and concern) among the kasina client base is the Department of Labor’s (DOL) fiduciary rulemaking effort, which Miyao believes will “significantly impact business practices up and down the investment services chain.” By way of background, the controversial rulemaking language is currently under final review by the Office of Management and Budget, with publication expected anytime in the next month to several months.

“All things considered, we are expecting to be living under this new rule by the end of 2016,” Miyao predicts. “When we talk with all the broker/dealers out there and all the asset managers, which again we are doing constantly, we clearly see a consensus has been reached that this is the case. The rule will soon be put into place in a form close to what we have already seen.”

Miyao uses the term “begrudging” to describe the industry’s movement so far to start getting itself in compliance with the new requirements of a strengthened fiduciary rule.

“They put their comments in and tried to augment and change the rulemaking, and the response has been that the DOL will take these things into consideration, but that they are still moving forward very deliberately,” Miyao says. “They are very aware it is an election year, keep in mind. The current administration wants to make sure they put enough of the rule in place, have enough of it established and in actual practice, that the next administration would have a very hard time reversing course without huge disruption.”

NEXT: Does it matter who wins the White House? 

In short, Miyao actually feels the presidential election will have relatively little impact on the new fiduciary rule.

“I don’t think it actually matters all that much who is going to be the next president, Democrat or Republican,” Miyao explains. “There is some potential for a change in course, but once you enact a rule like this and get all the processes and procedures and requirements in place—reversing all that is not as simple as just saying, ‘stop.’ The industry has to prepare extensively for the rule, and they are already preparing for it. They’re going to have to, over the course of the next year, prepare for live implementation, so all the effort and spending will have been put in place for this rule to go ahead by year-end 2016.”

Miyao goes on to explain that the clients he speaks with regularly, whether asset managers or broker/dealers or insurers, are pretty much all resigning themselves to the fate that a new fiduciary rule will soon be put in place.

“In fact, I believe it’s fair to say that the advisory, broker/dealer and asset management industries do not see it as feasible that a Republican president could hope to reverse course on this rulemaking at the start of his or her administration,” Miyao says. “If and when the rule is implemented before the end of the year 2016, it will be with us for some time to come, regardless of the outcome of the presidential election.”

Miyao adds that the “only way I can see there being a real impact from the presidential election with regards to the fiduciary rulemaking effort” would be if a federal district or appellate court agreed to put a stay or temporary injunction on the rule, before it goes into effect. This would require some pretty hefty legal maneuvering in a short period of time by the opposition, but it is still a possible outcome.

“It’s important to note that ’before’ is the operative word here,” Miyao concludes. “If a stay is not put into place and the rule actually goes into effect under President Obama, then the train will have long left the station by the time a new president comes in.” 

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