Recently, two clients engaged us to help them comply with the SECURE Act, which among other requirements, places new burdens on administrators of ERISA defined contribution plans.
The SECURE Act requires administrators show participants the estimated monthly lifetime income their account balance could support if they were to retire today, assuming they were 67 years old. (Technically, administrators will show the single life and joint and survivor annuity that could be purchased with the participant’s current balance, assuming she and her spouse are both 67 years old). This requirement necessitated a different approach.
When creating a retirement income illustration, Cantina works to design a realistic set of assumptions to project how much savings a participant will amass by the time she reaches retirement. Over the years we have developed credible, conservative techniques to model investment return, salary growth, inflation, savings rate, employer matching contributions, investment allocation, and other factors which typically contribute to a participant’s future savings and earnings. However, in defining the requirements of their illustration for the SECURE Act, the Department of Labor based the calculations solely on the participant’s current balance, and the assumption that she is retiring today at age 67, regardless of her actual age. In other words, the illustration knowingly excludes all of the savings and growth a participant may amass between now and retirement.
We understand the motivation behind this decision - by avoiding the challenge of projecting savings years or even decades into the future, the DOL has designed a model that is simple, easy to implement, and standardized across employers and providers. This approach has the added effect of encouraging participants to think of their retirement savings less as a “pile of money” and more as annual income they can compare to their current lifestyle. By excluding the impact of future savings, the DOL implementation fails to illustrate the enormous potential participants have to improve their retirement readiness by better decision making, increasing their savings rate, allocating more appropriately, retiring later, etc.
Most 401k providers, including our clients, demonstrate value not only with access to investment opportunities, but also insight and guidance on retirement saving strategy. They design their online experience and craft their message to engage participants who are in various states of retirement readiness, hoping to motivate and encourage those who might need it. As a result of the illustrations mandated by the SECURE Act, providers must now consider how to position the DOL’s illustration in a way that does not confuse, or worse yet, discourage participants.
For investors who find themselves behind in their savings, future investment and growth is crucial, and ought to remain at the forefront of their online experience. So while we develop the model to show the DOL’s illustration, we encourage clients to continue to provide forecasts and tools that take future savings and earnings into account. The story of a happy, secure retirement is one that needs to be told to ensure participants remain hopeful and engaged.