Income Projections Need More Flexibility

According to Ed Murphy, head of defined contribution at Putnam Investments, the idea of providing a glance at what a participant’s future finances might look like has been around for a while. Putnam Investments previously had a somewhat narrower focus and looked more into the methodology for calculating retirement income and converting it into income streams.

Several years along in their efforts to assist participants in making better retirement savings decisions, the firm has submitted a comment letter to the DOL as it prepares for rulemaking. The original deadline for comments was July 8, but it was extended to August 7 after several organizations requested more time to comment about lifetime income illustrations on defined contribution (DC) plan participant statements. (See “DOL Extends Lifetime Income Comment Period.”)

“Putnam is supportive of this initiative,” Murphy told PLANADVISER. “It’s the right thing to do, and the timing is right, although it’s still in an initial stage.” At this point there are several opportunities to strengthen and enhance these proposals to make them really effective.

According to Murphy, a participant’s future earnings balances should be figured in, as well as outside income. “Take account of asset allocation in a more specific way,” he said. “Lots of people have individual retirement accounts (IRAs) and accounts at other firms.” The workforce is mobile, he pointed out. “People tend to work at multiple companies over time.”What he’d like to see: Greater flexibility and the ability to input more information. 

More Flexibility and Personalization

Calling the current approach too limiting and too restrictive, Murphy said the proposed rule needs work. Otherwise, he cautioned, it could undercut what people are doing as they try to save for retirement. Instead of working in a broader middle ground, the DOL is at one end of the extreme with its proposal.

What makes the most sense, Murphy said, is to use a monthly balance to calculate future retirement income. “The current balance approach would be meaningless for the vast majority of participants, because it applies mostly to those who are closest to retirement.” Murphy points out that if this approach is used with younger participants, the future balance would be very small, and he worries this could have a demotivating effect on employees who are closer to the beginning of accumulation. “It could be a disincentive and would not change savings behavior,” Murphy said.

The DOL is depending on a narrow range of inputs, he said. Even though so many Americans depend on Social Security as a critical underpinning in retirement, the DOL does not include it in the calculation. A person’s health can definitely affect spending in retirement, and to some extent, this could be predicted by factoring in the health states that can drive mortality and health care costs, Murphy said: “The methodology is very narrow and not personalized.”

In January 2010, Putnam introduced its own retirement income calculator to help plan participants project what their retirement savings would generate in retirement. (See “Putnam Introduces Retirement Income Calculator.”) Since then, Murphy said, the firm has made a number of enhancements based on what they have learned from watching people use the tool.