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Few Read Mandatory Benefit Disclosures; Even Fewer Take Action

07/12/2018
By Jack Towarnicky

A recent PlanSponsor opinion piece confirms that some believe America’s “retirement savings crisis” results from worker misunderstanding regarding longevity risk and market performance.1  The proposed response by the experts?  More mandated disclosures.  The goal?  “Influence contribution behavior” (save more).2 

First Confirm Results Before Adding More Mandated Disclosures 

The PlanSponsor opinion piece first confirms: “… a strong bias against forcing other people, e.g., 401(k) plan participants, to do “what we think is right.” …  “ In fact, he suggests that “…  With respect to two of the three major defined contribution (DC) plan adequacy challenges—getting participants to contribute enough and to make efficient asset allocation choices— …  (he confirms success using a voluntary process that) preserves the right of the participant to opt out of the default regime.  However, he immediately rejects voluntary solutions to address the need for a “distribution strategy”:  “…  I want to put myself down as strongly in favor of a consistent lifetime income disclosure rule …”  So, I guess voluntary is good enough, except when experts conclude they prefer mandatory.  

The DOL cites research purporting to show that a mandated lifetime income disclosure will prompt greater savings.  However, that research and practical experience confirms mandated disclosures are not effective at prompting greater savings.  Since disclosure costs are typically paid by participants, before we add a new burden, let’s first ask the DOL and IRS to confirm the cost/benefit results and effectiveness of other mandated disclosures designed to prompt changes in participant behavior:    

Got results? Got results that confirm participants changed behavior once they received these mandated disclosures?  If you have such results, send them in (jtowarnicky@usaretirement.org).  I will blog about it – admitting and confirming my ignorance. 

Plan Sponsor Objections:

Plan sponsors object to adding another mandated disclosure regarding lifetime income, because:

  • The proposed mandated disclosure does not apply to the majority of individual account retirement savings assets, currently in IRAs, 
  • Participants with multiple accounts at different employers and in IRAs, won’t receive consistent estimates - $1,000 in plan A will have a different lifetime income stream than $1,000 in plan B,
  • Different estimates will use different commencement dates and different forms (e.g., age 65 single life annuity, or age 70 ½ installment payout, etc.),  
  • Estimates are ALWAYS inaccurate, even an immediate annuity commencing at age 65,    
  • Many recommend the projection include future savings and investment returns based on current plan provisions and savings election – such projections ignore the impact of future changes in statutes, regulations, turnover, investment elections, wages, and much more,  
  • A projection of lifetime income per $1,000 for a 30 year old in 2018, will be different than the same projection for a 31 year old in 2019, and the proposed disclosures do not require an “attribution analysis” to explain the reasons for the changes in estimates,  
  • Participants will shoulder all or most of the cost to create these erroneous projections, and 
  • Most participants won’t focus on the projection nor incorporate it into their retirement planning, or worse, they will incorporate the inaccurate estimate into their retirement preparation – no wonder the RESA legislation includes litigation protections for plan sponsors and service providers.  

Finally, most Baby Boomers will look to Social Security as a significant source of retirement income.  Go ahead, try to project benefits for years after the trust fund reserves are exhausted.

How Best to Solve the “Problem”

Mr. Barry asserts:  “…  Participants—who are, in the DC plan system, making all the key decisions—need to know what sort of retirement income their account balance can buy.  …”  He proposes,  “… my conclusion is that the simplest, least confusing and best way to present this information is to tell the participant what sort of age-65 life annuity he or she could buy with his/her current account balance. … Giving them a standard tool, that produces the same answer for them that it does for their neighbor, is an obvious next step.”  

We agree that workers need to know.  We agree that they need the “best” information.  But, we know most workers don’t read most mandated disclosures – they are too numerous, too long and too complex.6

 We might define “best” to be the estimate that is the simplest, least confusing, lowest cost, always accurate, fully transparent, and consistent (achieves the same result regardless of plan, participant, etc.)  For plan sponsors, “best” also means an estimate that is without cost, easily implemented, and one that doesn’t require a professional’s assistance or explanation.    

Best option to achieve all that?  I believe it is a statement that Mr. Barry rejects as a “non-solution” -   a statement, in bold, immediately below the vested account balance on every statement of a retirement savings plan or program (including IRAs) stating:  

“Divide this amount by 27.4 and you have the initial, annual, minimum required distribution from this account as if you were already age 70 ½.   Please incorporate this information in your retirement planning with any other retirement benefits and Social Security.”

No matter the plan or IRA, no matter the employment status, marital status, age, interest rates, inflation rates, etc., everyone would always get the same result per $1,000, every time!7  

Of course, plan sponsors and service providers and advisors can all voluntarily provide more.  Plan sponsors, service providers and advisors could refer workers to one or more of the many tools for those who want to obtain a more comprehensive, more holistic estimate of retirement income.8   

Help.  Let us know your thoughts.  Or, show us a better way.  Send in your comments/suggestions/recommendations (jtowarnicky@usaretirement.org).  


1 M. Barry, Barry’s Pickings: We Need Standardized Lifetime Income Disclosure, ASAP, 7/3/18, Accessed 7/6/18 at: https://www.plansponsor.com/exclusives/barrys-pickings-need-standardized-lifetime-income-disclosure-asap/

2The Lifetime Income Disclosure Act is part of the Retirement Enhancement and Savings Act of 2018 (RESA). Similar disclosures were part of Department of Labor, Employee Benefits Security Administration proposed regulations designed to: “… influence contribution behavior” (save more). ANPRM, 5/8/13, Accessed 7/6/18 at: https://www.dol.gov/find/20130507/2013-10636.pdf .

3M. Barry, Note 1, Supra

4According to the 2018 ICI Factbook, as of year-end 2017: “… employer-sponsored DC plans … held an estimated $7.7 trillion in assets. … IRA assets totaled $9.2 trillion … Investment returns and rollovers from employer-sponsored retirement plans, more than new contributions, have fueled the growth of IRAs. For example, the Internal Revenue Service Statistics of Income Division reports $473B was rolled over to IRAs in tax year 2015, compared with $64B that was contributed. … Accessed 7/6/18 at: https://www.ici.org/pdf/2018_factbook.pdf

5P. Armour. M. Lovenheim, The Effect of Social Security Information on the Labor Supply and Savings of Older Americans, Michigan Center for Retirement Research, September 2016. “… We additionally explore the extent to which the information on the Statement may have led some workers to mistakenly reduce their labor supply by too much due to a lack of understanding of the dynamic nature of the Statement’s benefit projections with respect to earnings. Receipt of a second Statement led all but the lowest hour workers to increase their labor supply relative to workers who did not receive a second Statement. This is consistent with workers misunderstanding the information provided as accumulated rather than projected wealth. …” Accessed 7/9/18 at: https://ideas.repec.org/p/mrr/papers/wp361.html

6 Towarnicky, Why Don’t Employees Read What We Send Them? Would Reading Mandatory Disclosures Make A Difference, Anyway? (Parts One, Two and Three.) 8/28/17, 8/30/17, 9/05/17, https://www.psca.org/mandated_disclosure_testimony_part1, https://www.psca.org/mandated_disclosure_testimony_part2, https://www.psca.org/mandated_disclosure_testimony_part3

7IRS Required Minimum Distribution Worksheet. The divisor, 27.4, is the factor incorporated in IRS tables. Accessed 7/9/18 at: https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf This current dollar estimate incorporates a variety of assumptions regarding investment returns, wages, inflation, etc. and the relationship among those variables. This estimate only reflects the initial, minimum required distribution amount – where each subsequent year’s installment payment will vary with changes in the account balance and investment earnings.

8See, for example: http://www.choosetosave.org/ballpark/ Accessed 7/6/18.

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