Lowell points out that when
actuaries do forecasting for defined benefit (DB) plans, they do not
look at one set of assumptions; they model multiple scenarios. If the DB
plan sponsor is risk-averse, it would look at the poorer outcomes and
hedge against them.
Lowell says the same can be done with DC
planning models. “The model I would like to see is one in which people
are able to input their own individual best estimate of what they think
they will do, and the model will perform various scenarios,” he says.
suggesting a model that doesn’t just show a scenario based on a
participant’s input and say ‘Yeah you’re good,’ or ‘No you’re not,’ but
one that starts with reasonable expectations, and shows a participant
all realistic outcomes,” Lowell adds. “The model will tell a participant
what percentage of time they will be in good shape and how often they
won’t, as well as what they can do to minimize the percentage of times
they are not in good shape, such as change asset allocations. It is OK
for a model to use questions like, ‘Do you anticipate work stoppages or
periods of time where you will have to stop or lower deferrals?’”
concedes this is not an easy model to build, but it is “doable.” He
says, “If it can be done for DB plans, it can be done for DC plans.”
such a model exists, Carrington says it is a great challenge in the
industry to help people piece together the complex retirement puzzle.
“We have to start talking to participants about the challenge,” he says.
“Rather than simply discussing only their DC assets, or only their
resources and not their household’s, we need to discuss the more complex
picture. This takes a combination of models, advice and communication
to make participants aware of the reality.”
Carrington adds that
financial wellness is important as well, because it helps people look at
budgeting at the household level and issues such as addressing debt. It
helps participants address challenges when their savings behaviors do
not fit a model’s assumptions. NEXT: How can plan sponsors help?