Data & Research June 14, 2012

Replacement Rate Studies Could Have Pitfalls

Plan sponsors should not rely on replacement rate studies when differentiating plan providers, a research paper contends.
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Plan sponsors are increasingly requesting replacement rate studies where each provider conducts an analysis to determine the potential impact or improvement of the given investment strategy on participants. In other words, they are using it to determine the “retirement success” of the participants if they use that provider’s or consultant’s product or solution, according to the research paper “Inaccurate Precision: The Danger of Replacement Rate Calculations.”

In many cases, the plan sponsor will supply a potential vendor with average (or median) plan demographics and ask the vendor for the expected replacement ratio at retirement for the average (or median) plan participant, explained David Blanchett, research consultant for Morningstar Investment Management and author of the paper. This approach can be dangerous because it does not take into consideration variables like outside assets and spouses, therefore making it nearly impossible to meaningfully compare the expected replacement ratio provided by two different vendors.

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“You have a very incomplete picture of [plan participants’] retirement readiness,” Blanchett told PLANADVISER.

The paper explores the important differences in how one defines the expected replacement ratio, as well as explains how replacement rate estimates can vary based on different assumptions and provide varying levels of insight. Blanchett used assumptions including savings rate, inflation, market forecasts and retirement age.

 

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According to the research, making relatively minor changes to a set of base assumptions can lead to a range in the median replacement rate for a plan to vary from 48% to 107%, and a range in the replacement rate for an individual to vary from 67% to 261%.

While the intentions of these replacement rate studies may be good, Blanchett said they will not help a plan sponsor make a “quality” decision among providers.

Instead, Blanchett suggested plan sponsors understand the methodology used to build the respective products and then select the approach that best matches the underlying goals and objectives of the plan sponsor. “You really have to understand the methodology instead, and understand how each provider reaches a solution,” he added.

Blanchett said he is concerned that the use of replacement rate studies could filter down market. Replacement rate studies are increasingly used in the large market, but Blanchett thinks small- and mid-sized companies could follow suit. “It’s reinforcing a bad decision, rather than moving people in the right direction,” he said.

 

Diversions June 14, 2012

Smartphone Users Believe Privacy Is Wherever They Are

Smartphones may have revolutionized how we communicate, but according to researchers at Tel Aviv University, they're also upending traditional ideas of privacy—especially in public.

 
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Researchers measured how the smartphone affects privacy and behavior in public spaces such as city squares and parks and public transportation. Even in these places, smartphone users are 70% more likely than regular cellphone users to believe their phones afford them a great deal of privacy, said Eran Toch, an industrial engineering professor who specializes in privacy and information systems at Tel Aviv University. These users are more willing to reveal private issues in public spaces, and they are less concerned about bothering people who share those spaces, he said.

Nearly 150 participants, half smartphone users and half users of regular phones, were questioned about how telephone use applied to their homes, and public, learning and transportation spaces. While users of regular phones continued to stick to established social protocol in terms of phone use—such as postponing private conversations for private spaces and weighing the appropriateness of cell phone use in public areas—smartphone users adapted different social behaviors for public spaces.


They were 50% less likely to be bothered by others using their phones in public spaces and 20% less likely to believe that their private phone conversations were irritating to those around them, the researchers found.


 

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Lost without a phone 

Smartphone use creates the illusion of a private bubble in a public space, added Tali Hatuka, a geography professor at the university. She also believes that the design of public spaces may need to change, not unlike the ways in which some public areas have been designated non-smoking. Toch also noted that smartphones and personal computing devices are becoming more “context-aware,” by self-adjusting display brightness and volume to the user’s location and activity.

Smartphone users were also more emotionally attached to their mobile devices. The majority of smartphone owners chose negative descriptors such as “lost,” “tense,” or “not updated” to describe how they felt without their phones. Regular phone users, on the other hand, were more likely to associate being without a phone with feeling free or quiet.

The next phase of the study will be a more in-depth analysis of how smartphone users incorporate this technology into their daily lives.

 

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