PLANSPONSOR - October/November 2021 - 16

UPFRONT
Inflation's Drag on Income Projections
TO VIEW their seemingly hefty retirement
savings in terms of maybe 240
" paychecks " is bound to disappoint many
plan participants. But add to-or subtract
from-that the effects of recent inflation
and interest rate declines, and some
participants might even panic.
This could be the case come January,
when participants view their first lifetime
income projections. Under the Setting
Every Community Up for Retirement
Enhancement (SECURE) Act, defined
contribution (DC) sponsors must, from
then on, supply such disclosures on participants'
quarterly plan statements; they must
also provide illustrations showing how the
person's savings would break down into
monthly payments. The Department of
Labor (DOL), in its interim final rule on
the subject, gives assumptions it expects
plan sponsors to use.
According to John Lowell, a partner
and actuary for October Three, however,
these assumptions will only confuse
participants- " and it will not be a happy
confusion. " Some individuals may panic,
he says, and if their financial future looks
too bleak, they could abandon trying to
improve it.
The sponsor can help, however, by
preparing participants in advance. It can
explain how the economy's negative turn
is affecting their savings. It can also clarify
what the disclosure numbers represent-
including where the model may be flawed.
As of now, the DOL's interim final
rule requires plan administrators to calculate
monthly payment illustrations as if
payments begin the last day of the benefit
statement period. They must assume
a participant is then 67 years old-the
Social Security full retirement age for
most workers-or use the participant's
actual age if the person is over 67.
In effect, this tells participants how
much in lifetime monthly payments they
could get if they were to annuitize their
savings at age 67, says Mathieu Pellerin,
senior researcher at Dimensional Fund
Advisors (DFA).
16 PLANSPONSOR.COM October - November 2021 Art by Lior Hizgilov
These assumptions do both sponsors
and participants a disservice, however,
Lowell says, and sponsors might want
to contract with someone to develop a
modeling tool or set of tools that use
different assumptions or a range of them.
" I'd let people reflect on what they think
their future behavior might be to see
some palatable moves to an achievable
future, " he says.
Tim Kohn, head of DC services at
Dimensional Fund Advisors (DFA), says
he breathed a sigh of relief that the interim
final rule lets sponsors also use other lifetime
income illustrations. Some might use
more realistic assumptions, he says.
Certainly, the lifetime income estimate
could go down, Lowell says, but
this should not be banked on. " Suppose
prevailing interest rates stay where they
are, and also assume the stock market
is currently overvalued and a correction
happens. Even if a participant continues
contributing to his plan, at best the lifetime
income estimate will stay the same. "
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PLANSPONSOR - October/November 2021

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