The Problems With Lifetime Income Disclosures

Lifetime Income Disclosures

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Mandated lifetime income disclosures are as likely to reduce account balances as to increase them, and they are more likely to mislead than inform.

“If the goal is to increase retirement savings, there is ample evidence of what works—automatic features.”

The guidance to implement these mandated disclosures closely follows the actual statute. Unfortunately, this addition is not likely to prompt significant improvements in pre-retirement preparation. Here’s why:

Note:  There is no requirement for an “attribution analysis” that would identify the reason for the change in the lifetime income projection.

How will plan participants respond when they get lifetime income guesstimates for each employer-sponsored plan that are accompanied by this explanation?

The disclosures are intended to confirm the (lack of) preparation for retirement with a goal of promoting greater savings. The guidance cites a study of university workers where:

Conclusion

Yes! A voluntary estimate of lifetime income based on accumulated savings has merit … but only if the estimate:

This mandated disclosure is none of the above.

One study I have often cited to confirm a lack of financial literacy/numeracy shows that only one-third (34%) of survey respondents could correctly answer three straightforward questions.[i]

If you consider this literacy starting point and add in the challenge that workers face in managing multiple plans and processes due to turnover, as well as incorporating a spouse’s plans, a plan administrator’s efforts at disclosing lifetime income is likely to be a Sisyphean challenge.[ii]

If the goal is to increase retirement savings, there is ample evidence of what works—automatic features.

I always appreciate your criticisms, suggestions, improvements, etc. Feel free to contact me at:  jacktowarnicky@gmail.com.

Disclaimer No. 1: My comments are my own based on my experience in plan sponsor and consulting roles – they do not necessarily reflect those of any employer, group, or association I have been employed by or affiliated with, past, present, or future.

Disclaimer No. 2: This information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for) legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used, and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market, or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.


[i] A. Lusardi and O. Mitchell, Financial Literacy and Planning, Implications for Retirement Wellbeing, 2011: “Only two-thirds of the respondents understand compound interest. … More of the respondents, three-quarters, can answer the inflation question correctly and understand they would be able to buy less after a year if the interest rate was 1% and inflation 2%. Yet only half of the respondents know that holding a single company stock implies a riskier return than a stock mutual fund.  It is also of interest to distinguish between those who can give a correct answer versus those giving either an incorrect answer or saying they “don’t know” … only 9% did not know about interest compounding, but more than one-fifth (22%) gave an incorrect answer.  On the inflation question, 10% did not know, while 13% gave a wrong answer. The question about stock risk elicited the most don’t know’s, one third (34%) of the sample did not know, while a smaller fraction (13%) gave a wrong answer.” See: www.nber.org/system/files/working_papers/w17078.pdf

[ii] In Greek mythology, Sisyphus cheated death twice.  His punishment? He was forced to roll an immense boulder up a hill, only for it to roll down every time it neared the top, repeating this action for eternity.  Through the classical influence on modern culture, tasks that are both laborious and futile are therefore described as Sisyphean.

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