So you’ve done your homework over the last couple of years and have your CAP Guidelines review, leading to the implementation of some plan monitoring policies. Some are fairly obvious and generally front and centre, such as looking after the performance and adequacy of your investment options.
Others may fly a bit under the radar, as you may not know too well how to put them into action. I would venture that it is the case for reviewing how well your record keeper provides your plan members with adequate decision-making tools, including retirement income projection calculators. You likely assume that such a large company must be doing it right after all. Perhaps you should take a closer look.
Euh…
Generally used as a “what-if” tool by members—well, those who actually use them— income projection tools (IPTs) help members determine whether they will reach their goals and are, therefore, central in the help you are providing for the following reasons:
• They are key to support members in deciding how much to save for retirement and can be a big wake-up call for those saving little;
• IPTs may help members assess what kind of long-term returns they need and push them to review how they are invested; and
• They help you, as a sponsor, manage member expectations early by letting them know how much they can expect from your plan(s)—or all their retirement savings, if you’re lucky.
Oh!
So what should you be looking for in your review of IPTs? Well, sophistication varies somewhat widely from one provider to another, but most do a good enough job…provided you are not too picky about certain aspects. To get you started, here are a few things you should be wary of:
My personal favourite: the projection rate of return (ROR)—Members are provided with all sorts of fancy educational materials, including risk tolerance questionnaires, which allow them to determine how they should invest their savings. However, once they have done that, they are generally free to enter whatever ROR they “expect” they’ll be getting in the future. The problem here is that the vast majority of members have no idea what to use and in our experience typically use either a “desirable” ROR or a round number, ending up between 8% and 10%—returns that are likely unachievable over the long term, particularly on a net basis. Not helping members in this crucial area may leave them living in a dream world—and waking up will be painful.
Future dollars vs. today’s dollars—Most tools will provide a projection of accumulated savings at retirement, which frequently attain well over $1 million. Projected income will also be expressed in time-of-retirement(future)dollars, which gives members a false sense of success, as that number may be quite deceiving when brought back in today’s dollars. To manage expectations adequately, members should be able to assess the real value of the income they can expect to receive.
Volatility of actual retirement income—Almost all IPTs currently available are “deterministic” in nature. In other words, they provide members with only one resulting scenario, assuming, more particularly, that the ROR the member picked will be achieved each and every year in the future. If there is one thing we all know, it’s that this will not happen. As a sponsor, this may be tricky as some members may interpret such a projection as being “what I was told I would receive.” “Stochastic”—sorry, an actuarial term—projections(i.e., providing results under multiple sets of assumptions)would make it clearer for members that the projections they are getting are not guaranteed and their expected retirement income is likely to fluctuate with time.
Ahhhh!
The good news is, some providers are currently working on improving their IPTs, which will greatly benefit both members and sponsors. As a plan sponsor, you should take a look at the IPT made available to your members and assess how well it will actually help them adequately plan for their retirement.
If you find any shortfalls, you should act by formally communicating your assessment results to your record keeper and ask for potential solutions. For the short term, these may consist in additional communication that will address the identified issues and sensitize your members to them. For the longer term, you may ask for precise timelines as to when improvements will be brought to the IPT, or, if you find you are having other concerns with your current provider as well, possibly considering a provider search to find a better fit with your and your plan members’ needs.
In any event, you should actively promote the use of IPTs as early as possible so as to maximize the odds that members will reach their retirement goals. Members will be more likely to succeed in their planning, and you will reduce the risk of being blamed for not having adequately informed them of the actual benefits of the plan. A situation worth projecting yourself into.