A lot of ink has been spilled since the U.S. Department of Labor raised the issue of how to best illustrate for Americans what their retirement savings might look like, spread out over all of the years after they stop working.
Little of it has been positive.
More than 100 retirement industry associations, insurance companies, third-party administrators and service providers have written the DOL to share their thoughts on its proposal to include lifetime income illustrations on defined-contribution plan account statements.
The majority of respondents say they like the idea of helping plan participants better understand how their current retirement savings will translate into lifetime income upon retirement.
But that’s where agreement stops. After that, there are plenty of differences of opinion on the details, starting with what is clearly fervent opposition to making such illustrations mandatory.
The industry began to file its response soon after the DOL on May 7 announced it was considering requiring that pension benefit statements for defined contribution plans include the illustrations.
Under DOL's contemplated proposal, a pension benefit statement for defined contribution retirement plans would show the current balance of a participant's retirement account, as well as a projected account balance at retirement.
The statements also would include two lifetime income illustrations that would be based on the current balance of a participant's retirement account and the participant's projected account balance “at normal retirement age.”
The comment deadline was initially July 8, but DOL later extended that to Aug. 7.
The biggest sticking point to emerge? Aside from opposition to anything mandatory, the industry is clearly up in arms over what it views as a lack of flexibility in the proposal’s safe-harbor clause, which some say would expose plan sponsors to fiduciary liability.
DOL’s income tool too limiting
In its letter to the DOL, industry giant Towers Watson said it thinks the best way to educate and assist participants is through interactive modeling tools – including one created by the DOL – though TW believes the DOL’s version should include more functionality.
Indeed, lots of plan providers already use lifetime income calculators, many that are more robust than what the Department of Labor has devised.
Towers Watson, echoing an industry sentiment heard again and again, also believes that plan sponsors should have the flexibility to address these issues on a voluntary basis, in the manner that is most appropriate for their plan participants.
Perhaps more critically, TW took issue with the DOL’s flat 7 percent assumption, being used in the safe harbor to calculate investment returns, and its flat inflation safe harbor of 3 percent.
Historically, low interest rates make “a 7 percent return difficult to attain for many asset mixes. Having a flat safe harbor that does not reflect the wide variation of expected returns caused by different asset mixes is also a concern,” its letter said.
As an alternative, Towers Watson offered that “a safe harbor could easily be tied to one of the readily available CPI measures.”
“To adopt a fixed approach is to assume static economic conditions, which does not seem an advisable approach,” it said in its letter.
Many others weighed in on the topic of flexibility, including the American Society of Pension Professionals & Actuaries and the Insured Retirement Institute. Both agreed with Towers Watson that the assumptions used in the safe harbor to calculate a person’s lifetime income should not be fixed. They believe it would be more helpful to participants to see a range of projections based on different calculations, say 3 percent, 5 percent and 7 percent investment return calculations.
For its part, the Plan Sponsor Council of America believes that the safe harbor clause included in the DOL’s proposal will result in a major reduction in the availability of other retirement-income calculators – if not something more serious.
“Given the broad availability of retirement income calculators, the cost-benefit analysis does not favor this new mandate, which would create new costs and fiduciary liability exposure for plan fiduciaries,” the PSCA wrote. “These costs are often passed on to participants, thereby reducing earnings. Fiduciary liability exposure is a disincentive to offering a plan.”
The PSCA went further, saying it doesn’t believe the DOL has the authority to pass this type of mandate under Section 105 of the Employee Retirement Income Security Act.
“Lifetime income stream illustrations and projected account balances are not required under Section 105. It will be helpful for the Department to explain how it determined that its authority under Section 505 permits this broad interpretation of Section 105,” its letter said.
BlackRock, an asset management firm, had a different take on the mandate, saying that if one is required, it should only apply to those nearing retirement. Because of the different variables and the length of time participants have to save, any projections based on fixed assumptions would do a disservice to younger workers, BlackRock said.
“While we appreciate the Department’s desire to furnish participants with more meaningful information about their defined contribution savings, we do not believe that plan sponsors should be required to provide projections of account balances or income projections,” the company said in its letter.
BlackRock also said the DOL shouldn’t require the illustrations be displayed in any specific format.
Perhaps most constructively, the Insured Retirement Institute said it is hopeful the DOL will look at some of the tools available today and allow plan sponsors the flexibility to use them going forward.
The DOL hasn’t announced when it will release its final rule.