More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
Few workers would be surprised to find out how much their current savings in a 401(k) plan would provide them in monthly income, and few are likely to save more or worker longer based on that income projection, according to a new analysis by the Employee Benefit Research Institute in Washington.
Last May, the Department of Labor issued a proposal to require retirement plan statements to show how a worker’s current account balance would translate into an estimated lifetime income stream of payments. DOL plans to issue a lifetime income rule proposal in August.
Based on an analysis of the results of the just-released 2014 Retirement Confidence Survey (RCS), EBRI found that while the vast majority of respondents (only workers who were currently contributing to an employer plan) found the information useful, they weren’t surprised about the income projection.
More than one in three (36%) of the respondents thought that it was very useful to hear an estimate of the monthly retirement income they might expect from their plan, and another 49% thought it was somewhat useful, EBRI found.
However, EBRI found that the information didn’t seem to come as a surprise to many. More than half (58%) thought the estimated monthly income was in line with their expectations.
Perhaps because of that, relatively few (only 17% of the respondents) said they would increase their retirement savings contributions as a result of hearing the monthly income estimate, while 81% of the respondents indicated that they would continue to contribute at their current rates after hearing the projected monthly income amount.
However, of those responding that their illustrated value was much less or somewhat less than expected, more than a third (35%) indicated they would increase their contributions.
“It is possible that these respondents’ current participation in employment-based plans has already provided them with a sense for what their retirement savings balances would provide,” noted Jack VanDerhei, EBRI research director and author of the report.
Fred Reish, partner and chairman of the financial services ERISA team at Drinker Biddle & Reath, said that he's not surprised "that 35% (of the group that saw lower than expected projections) said the information would lead to increased contributions. Many people will take needed steps when they get the right information."
However, Reish said he was surprised, for two reason, that 58% of the respondents said the projections were in line with their expectations. "When I talk with people, almost no one can give me an estimate of the retirement income that their accounts will generate," he said. "Second, retirement income projections are actuarial calculations, and most people don't know how to do those...interest assumptions, inflation assumptions, compounding of earnings, etc."
Since the concept of lifetime income illustrations on 401(k) statements is a relatively new innovation, and “little empirical evidence exists regarding how plan participants would respond," EBRI said that survey respondents who were currently contributing to an employer plan were asked:
“In recent years, a number of organizations have developed calculators to estimate how much a retirement plan will provide as monthly income for life. Your answers to the next two questions will allow us to estimate that monthly amount for you to react to.
How much money do you currently have saved in your employer-sponsored plan in total?
How much money in total do you and your employer currently contribute to your employer-sponsored plan annually?”
A total of 223 respondents provided a definite response for both of these variables in addition to the age at which they expected to retire.
Taking a cue from DOL, a bipartisan group of senators introduced a bill last June that would allow workers in retirement plans to receive an annual statement of how their lump-sum savings translate into a lifetime stream of monthly income.
The Lifetime Income Disclosure Act was introduced by Sens. Johnny Isakson, R-Ga.; Christopher Murphy, D-Conn.; Tim Scott, R-S.C.; Bill Nelson, D-Fla.; and Elizabeth Warren, D-Mass.
The companion bill, H.R. 2171, was previously introduced in the House by Reps. Rush Holt, D-N.J.; Tom Petri, R-Wis.; Ron Kind, D-Wis.; and Dave Reichert, R-Wash.
Both bills remain in committee.