Even before the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the defined contribution (DC) retirement plan industry was increasingly focused on the topic of retirement income, or “DC plan decumulation.”
With the landmark retirement legislation’s mandate that plan sponsors provide their participants with regular lifetime income disclosures, the issue remains top of mind, even during a viral pandemic and a hotly contested presidential election. Notably, the U.S. Department of Labor (DOL) is currently in the process of digesting public comments about its proposed SECURE Act lifetime income projection framework.
In recent conversations with PLANADVISER, some of the leading retirement plan recordkeepers offered insight about how they currently generate lifetime income disclosures. For the most part, what recordkeepers are doing today is far more individualized and sophisticated than the methodology that will apparently be mandated by the DOL. This fact has raised concerns among many, but not all, retirement industry stakeholders. In simple terms, the DOL’s proposed approach will generate several different income projections based on a uniform set of assumptions that some worry may not be reliable for all participants in an increasingly diverse workforce.
Comparing the DOL’s proposed approach with how Fidelity tackles lifetime income projections, Shankar Saravanan, a senior vice president focused on client experience, says the firm takes a three-tiered approach. First, on the home page of the participant portal, Fidelity provides a basic retirement confidence analysis that takes into account such factors as salary, past contribution history, investment philosophy, etc.
“This initial estimate is meant to provide a basic understanding of how a person’s savings strategy stacks up in terms of general recommended milestones,” Saravanan says. “This straightforward presentation uses a color-coded system that is based in behavioral economics to show someone right away whether they are on track to generate sufficient lifetime income.”
Second, the same landing page also shows the participant a lifetime income projection presented in terms of a monthly payment, as the DOL’s proposed framework would do. However, Fidelity’s number is presented in direct comparison with what a person may reasonably expect to need in terms of monthly income to cover their projected expenses. This framing is designed to prompt those who are behind their savings goals to consider taking action to improve their outlook.
The final part of the lifetime income analysis is the provision of what Saravanan describes as “a more sophisticated retirement planning tool.”
“Our sophisticated retirement income calculator tool allows a person to essentially play around with their age, to input their spouse or partner’s financial details, and more,” he says. “You can input whether you are planning to delaying taking Social Security, for example. The goal is to provide a much more robust and personalized outlook for the participant, complemented with educational resources. When you add this all up, you get a good perspective about whether a person is on track.”
Keri Dogan, senior vice president, retirement income, Fidelity, says that plan sponsors are already asking a lot of questions about the DOL’s lifetime income disclosure mandate. Some say they are concerned that participants with low balances could be essentially scared away from investing further, because the DOL’s approach will seemingly not factor in future expected contributions. Others are more focused on the liability that could potentially come along if they fail to meet the DOL’s expectations once a specific disclosure framework is finalized. For these reasons and others, Dogan expects, recordkeepers and other service providers are likely to play a leading role in the creation and distribution of the DOL’s mandated lifetime income disclosures.
Fidelity’s approach to presenting income-oriented information is far from unique among today’s recordkeepers, though not all of them present a lifetime income projection figure on the first view of the participant portal. T. Rowe Price’s participant webpage, for example, immediately presents a color-coded retirement confidence score, similar to Fidelity, but the main feature on the landing page is a graphic presentation that compares a person’s balance with the recommended savings goal for their age. This presentation allows one to see immediately if they are ahead, on track, or behind when it comes to achieving a secure retirement. One click allows the participant to shift the graph to view how their retirement years may look, with a focus on demonstrating how long savings will last if the person annually withdraws 75% of their final working salary.
In the case of Empower Retirement, an employee’s projected income is also the focal point of the participant website experience, allowing them to quickly view the percent of their estimated income they are on track to replace. Participants can compare their savings to their peers’ savings and factor in their estimated health care costs in retirement. Similar to the T. Rowe Price and Fidelity websites, Empower’s participant portal allows individuals to engage in much more sophisticated income planning by inputting additional information, such as outside asset amounts and expectations about when and how they will enter retirement.
Vanguard tells PLANADVISER it is currently in the process of overhauling its participant experience, including the way it will present lifetime income information. This is in no small part because Infosys is assuming day-to-day operations for Vanguard’s DC plan recordkeeping business, including software platforms, administration and associated processes. Through a strategic partnership, Infosys and Vanguard will provide a cloud-based recordkeeping platform, which they say will provide “greater insights and unprecedented personalization to help deliver better participant outcomes.”
Though not itself a DC plan recordkeeper, Pacific Life Insurance Co. has recently introduced the Retirement Income Translator, an online tool to help individuals understand what their retirement savings can mean when translated to retirement income. Pacific Life says the Retirement Income Translator tool can be a great resource to help educate individuals about the projected monthly value of their retirement savings.
Pacific Life’s tool creates a two-minute personalized video that aims to illustrate the potential benefits of protected lifetime retirement income delivered through an annuity. The company says the tool also can encourage individuals to start the retirement income conversation with a financial professional.
“There is an information gap,” says Christine Tucker, vice president of marketing for Pacific Life’s Retirement Solutions Division. “Many consumers don’t know what their savings mean when it comes to retirement income, nor do they know if or how an annuity can help them.”