Informed consumers can be a powerful antidote to bad news about advisors who do wrong by their clients.
By Cyril Tuohy
In case the industry hadn’t noticed, there’s a big change afoot among workers in terms of what they want to know about their investments.
Workers, it turns out, may be far less interested in knowing how much they have than they are in knowing how what they have translates into future income.
This is a huge change.
“Providing an estimate of what their monthly income will be in retirement has been well received by most U.S. workers,” Alison Salka, corporate vice president and research director for the LIMRA Secure Retirement Institute, said in a news release.
A recent survey of 2,024 consumers by LIMRA’s SRI found that 90 percent feel retirement income projections somewhat or very helpful.
It’s a big change. For decades, asset managers and software systems architects have spent much of their energies disclosing what workers had in their accounts.
Consider the 401(k) statement. It has typically featured the employee’s account balance, the vested balance, deferral percentages, investment choices, personal rates of return, and automatic deferral increases. Pie charts and tables concern themselves with the investment mix and asset allocations within a worker’s 401(k) portfolio.
Fees, too, are in the statement somewhere, if you can find them. Pension benefit statements have progressed to a point of extreme granularity with regard to the contribution phase of life, yet remain an information desert with regard to the distribution phase.
All these disclosures about a worker’s defined contribution retirement assets have been an asset manager’s game, not a plan participant’s game. The 401(k) statement in formation is helpful, and tells you what you have, and what you can invest where.
But it’s hardly a real value proposition for many workers who need to know how much future income they can receive from what they currently own. For example what will a 401(k) balance of $150,000 yield in 30 years for plan participants, assuming that they continue to contribute at their current rate.
Plenty of other factors are at play, of course: inflation, contribution amounts, rates of return, time horizons. Incorporating those variables only means tweaking software code and altering algorithms. Even the least financially savvy workers understand the numbers are an estimate. Safe harbor clauses are there to protect employers if projections are off the mark, as well, so there’s no risk for sponsors to insist on better disclosure about income.
Only half of U.S. workers have seen a monthly retirement income projection. Workers contributing to a defined contribution plan are nearly twice as likely as those who are not contributing to have seen a retirement income projection (67 percent versus 35 percent), the LIMRA survey found.
The Lifetime Income Disclosure Act, which would amend the Employment Retirement Income Security Act of 1974 (ERISA), would inform workers of how much their existing retirement assets would mean for future income.
In the Senate, the bill, S-1145, has the backing of Sens. Johnny Isakson, R-Ga.; Christopher Murphy, D-Conn.; Tim Scott, R-S.C.; Bill Nelson, D-Fla., and Elizabeth Warren, D-Mass. The House version, H.R. 2171, was introduced by Rep. Rush Holt, D-N.J.; Tom Petri, R-Wis.; Ron Kind, D-Wis, and Dave Reichert, R-Wash.
Despite bipartisan support in both chambers, the bill has languished as lobbyists representing the insurance, mutual fund and financial record-keeping industries bicker over details of the proposed ERISA amendments.
More financial details are required with regard to projections of future contributions, the Investment Company Institute, the primary mutual fund trade group, insists. Any projected lifetime income streams should not be based solely on annuity income calculations.
The American Council of Life Insurers and the National Association of Insurance and Financial Advisors (NAIFA) are among the insurance industry groups that support the bill.
In an interview with InsuranceNewsNet earlier this year, Judi Carsrud, director of federal government relations for NAIFA, said the bill would provide an impetus for employees to save more as they realize how little they have stashed away for retirement. “It’s hard for people to know how a bucket of money translates to monthly income over a lifetime of retirement,” she said.
The Labor Department is expected to present lifetime income illustration proposals next year.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
© Entire contents copyright 2013 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.