401(k) participants are not getting any younger and many face the harsh reality of working beyond normal retirement age to fund the type of lifestyle they desire at retirement. Currently, there are proposals before Congress to include annuity illustrations otherwise know as “Gap Analysis” on participant statements to present a snapshot of any projected “Gap” in monthly income at retirement. The “Gap,” being the difference between 80% targeted income replacement and projected income replacement, based on inputs such as age, salary, current account balance, current deferral percentage, estimated interest rate and salary increases.
Congress is contemplating making an illustration on benefit statements a required disclosure. The problem with this? Current benefit limits make it impossible for many retirement plan participants in a 401(k) plan to reach 80% income replacement even if they tried. In fact, some defined contribution plans do not include a deferral feature, so the employee can’t possibly influence their retirement preparedness within their employer sponsored plan.
For example, consider a 50 year old participant with a $500,000 total “Gap” in retirement savings at normal retirement age. Using 2012 benefit limits, the participant could contribute $17,000 in ordinary elective deferrals plus another $5,500 in age 50 catch-up contributions, for a total of $22,500. Over 15 years (assuming normal retirement age is 65) they would have saved only $337,500. So, what might I ask, is the benefit of showing the participant a problem they can’t possibly solve?
Employers who sponsor retirement plans are under plenty of scrutiny as it is. The new 408(b)(2) and 404(a)(5) fee disclosure rules that take effect later on this year will fully expose the true costs of the retirement plan for its participants. The combination of full fee disclosure and graphical illustrations of shortages in retirement savings could be a recipe for disaster, which may lead to additional participant lawsuits.
Instead of making these illustrations mandatory, why not focus our efforts on permanency of tax deferred savings opportunities in 401(k) plans with increased savings limits that actually enable participants to achieve adequate retirement savings? How about lowering the age for catch-up contributions to age 40 to allow participants to catch-up sooner?
Retirement plans were developed to enable hard working people to reach their savings goals. Fee disclosure and transparency are steps in the right direction, but there’s more to it. As benefit professionals, we need to work together to make the participant statement a good news message, not a disappointment.