In a blog post about best practices, ERISA attorney Fred Reish explores retirement income projections as a way to better serve plan participants. And he cites the 403(b) market as among those such information can serve.
Reish explains why he includes retirement income projections among the best practices he suggests for plan sponsors. “Best practices are not mandated; they are elected,” he writes, noting that retirement income projections are not currently required, the pending Retirement Enhancement and Savings Act (RESA) legislation in Congress includes a provision that would mandate them.
So while considering providing retirement income projections – or preparing to do so – may be prudent, for now it’s a choice.
Reish notes that plan participants must receive quarterly reports on their account balances and how their account funds are invested. But, he says, “While that is important information, it is only part of the story.” Reish argues that while they provide important information, account balance statements are “a snapshot” and that they don’t provide “the most important information, which is whether a participant is on course to have a financially secure retirement.”
To make information available to participants, Reish says, they need to be supplied with retirement income projections and gap analysis that provides a benchmark for whether retirement income will be adequate and identifies whether a gap exists between projected income and that benchmark.
Reish notes that some object to retirement income projections, but argues that while they may be inaccurate, they still can be “directionally correct” and “provide valuable information to participants about whether they are saving enough to reach their goals.” And, he adds, projections will be updated annually, which would afford participants a chance to make adjustments.
Reish further argues that providers and plan sponsors are in a better position than participants to know what actuarial assumptions should be used in arriving at retirement income projections. In addition, he says, while retirement income calculators are available online, most participants have not used them. “While some might argue that participants have that responsibility, I am not of that school of thought. I agree that people should be responsible for themselves. But, I don’t agree that we should continue to rely on services that aren’t working. Let’s do things that work, rather than taking dogmatic approaches,” he says.
For good measure, Reish notes that some providers have already been providing retirement income projections “for years and have done so successfully” and that this has been the case “particularly in the 403(b) area.”
“My view of the future is that, if retirement income projections and gap analysis are offered to participants, with annual updates, we will have better outcomes... because participants will be empowered to make smarter decisions about deferral rates, investing, retirement ages, and so on,” Reish writes.