On November 17, the Lifetime Income Risk Joint Committee of the American Academy of Actuaries submitted comments regarding the DOL/EBSA Interim Final Rule on Lifetime Income Stream Equivalents (LISEs) to be included in benefit statements provided to participants in defined contribution plans. We agreed with most of their comments, as they were reasonably consistent with comments we submitted earlier this year. Our comments were discussed in our posts of May 29, 2020 and September 1, 2020. This post will summarize primary areas of broad agreement and one minor area of disagreement with the recently released Academy comments.
Areas of General Agreement
We agree with the Academy that:
“Providing information that illustrates the effect of future contributions, investment earnings and retirement age…has a greater potential to inform individuals in a manner that promotes better retirement security.”
and
“Illustrating an annuity that increases each year based on an assumed cost-of living adjustment increase is valuable for understanding retirement readiness.”
We also agree that:
“the EBSA Lifetime Income Calculator should be updated to be consistent with the benefit statement assumptions in order to offer participants a more robust modeling tool” and that the existence and purpose of this modeling tool should be referenced in model benefit statement language.
Area of Minor Disagreement
The Academy would like to see additional LISE information provided directly to participants on an expanded personal benefit statement. We, on the other hand, believe that the additional information desired by the Academy may be more efficiently and inexpensively provided via a more robust modeling tool that could be made available to everyone (including non-DC plan participants) on the DOL/EBSA website or elsewhere.
While additional benefit statement LISEs may help financial planning, they may also be confusing, and they are clearly not called for in the enabling SECURE Act legislation. Performing the additional calculations desired by the Academy would also be more expensive than proposed by EBSA.
And while the Academy implies that the additional information would be worth the added cost by saying,
“We appreciate EBSA’s objective of minimizing the efforts and costs that employers will incur in satisfying this new requirement; however, we feel that a few changes can further the goal and at the same time improve the value of the lifetime income illustrations,”
it is important to note that plan administrative fees are frequently paid by the plan participants and not the plan sponsor (See Exhibit 7.1 of the Deloitte 2019 Defined Contribution Benchmarking Survey Report). Therefore, it is quite likely that the cost for this additional information desired by the Academy will be borne by plan participants and not plan sponsors.
Summary
We agree with the American Academy of Actuaries that, “Evaluating the lifetime income derived from only the current accrued benefit is a minor part of understanding retirement preparedness,” and we are pleased that the Academy supports the development of more robust modeling tools to “[educate] participants about the challenges of building sufficient retirement income.”
In our post of June 9, 2018, we indicated that if the Academy is serious about fulfilling the profession’s mission to serve the public and increasing the public’s financial literacy using actuarial models, the Academy should kick the tires on our Lifetime Income Stream Equivalent translator, ALRIE, and take one (or a combination) of the following actions:
- Endorse it
- Suggest changes to us for ways to improve it
- Develop a better alternative to it with or without our input
- Make it (or an improved version) available on your website just as you do with the Actuaries Longevity Illustrator
In this post, we again suggest that the Academy consider these (or similar) actions, particularly if the final DOL/EBSA benefit statement guidance/website calculator tool does not provide the meaningful information that the Academy believes is appropriate.
And, if the Academy is looking for even better, more comprehensive models designed to educate individuals about the challenges of building sufficient retirement or developing spending budgets in retirement, we recommend the Academy consider publicizing our Actuarial Budget Calculator (ABC) models. Recognizing all of an individual’s or couple’s assets and spending liabilities, our models determine an estimate for how much one can afford to spend on non-recurring expenses and recurring expenses, not just how much lifetime income a participant’s defined contribution balance may provide, in retirement.
