Corporate Insight analyzed the retirement calculators of 12
financial institutions—six of them retirement plan recordkeepers and six not—and despite
inputting the same data points for each, found exceptionally different results.
The monthly income projections ranged from a high of $6,013 to a low of $3,772,
a 60% spread, and the differences between the monthly income goals were even
wider, ranging from a high of $9,029 to a low of $4,892, an 85% spread.
Corporate Insight found six variables that drive the
differences in income—taxes, inflation rate, salary growth, Social Security
benefits, investment returns and ages—and four differences that drive the
variances in income—income replacement ratio, salary growth, inflation rate and
taxes.
“While the inputs and assumptions were disconcerting, the
action steps suggested, or lack thereof, were equally alarming,” Corporate
Insight says in its report, “The Looming Problems With Retirement Planners.” “Ideally,
tools should allow users to adjust inputs directly on the results screen that
dynamically adjust their retirement income projections.”
Nine of the tools provide a gap analysis, but these, too,
vary significantly. “Principal’s tool states that the user will have a monthly
income shortfall of $4,597, by far the largest,” Corporate Insight says. “TIAA’s
tool projects the lowest income shortfall of $1,120 a month, a whopping 310%
less than Principal’s.”
The biggest driver of the income projections is the
investment return assumptions, according to Corporate Insight. Some of the calculators
don’t allow users to change the returns pre- and post-retirement, three do not
account for salary growth, two do not take Social Security benefits into
account and one doesn’t take inflation into account. Life expectancies also
differ, and only two of the calculators show results post-tax.
The income replacement goal also varied widely: between 85%
and 60%. Ten of the calculators provide retirement terminology definitions.
Some of the calculators ask users to estimate their state and federal taxes in
retirement, rather than asking them to input their zip code and other details
that could impact taxes, such as number of dependents and marital status.
Corporate Insight says it is also faulty for some of the
calculators to ask people to determine how much savings they will need by the
time they retire, rather than a percentage of final income. Two of the
calculators show projected income in future dollars, which could lead users to
assume they will have more than enough money saved, when that will not be the
case. And only a few of the calculators provide actionable advice, rather than
promoting the company’s own products. It is also important for users to be able
to print the results, so that they can share them with their financial adviser,
Corporate Insight says.
In conversation with Anne Lester, one of J.P. Morgan’s leading
voices on public policy, we hear about the growing sense of urgency she sees in
Washington to help more people prep for retirement.
Anne Lester is a portfolio manager and head of retirement solutions
for J.P. Morgan Asset Management, and in that capacity she works to advance
the firm’s various retirement investment product offerings—including the
development of the SmartRetirement target-date funds (TDF) series, as well as the
firm’s Dynamic
Withdrawal strategy.
Given her experience, Lester is frequently called on to
provide thought leadership both within the firm and for wider audiences working
on the intersection of public policy and retirement. Just last week Lester was in Washington for an event hosted
by the Aspen Institute, marking the upcoming 10-year anniversary of the debate
and passage of the Pension Protection Act (PPA).
Joining her were U.S. Representatives Joe Crowley, D-New York, and Jared Polis, D-Colorado, along with Edmund
Murphy III, president of Empower Retirement, and a number of other lawmakers and retirement
industry leaders. PLANADVISER spoke with her shortly after the event to test her optimism
about the potential for any new retirement-related legislation to continue the
progress made post-PPA.
Q: What did the event last week, held to mark the PPA anniversary, tell you
about how policymakers are viewing retirement readiness issues? Do you think
positive change is likely?
First I should say
that it was a fantastic event, hosted right in the Capitol Rotunda by the Aspen
Institute. It was an inspiring place to hold an event about our national retirement
policy and it was fantastic to see the turnout.
Besides the
representatives and officials from the Treasury, there were members of academia,
think tanks, as well as a diversity of business
interests and advocacy organizations including TIAA, Prudential, the Urban Institute,
J.P. Morgan Asset Management, the Defined Contribution Institutional Investment
Association (DCIIA), the National Institute on Retirement Security (NIRS), and
the Employee Benefit Research Institute (EBRI).
We were all speaking
about where we have been and where we are going in terms of trying to continue
to reinforce retirement security at the national level, and I think there is a
collective understanding that the 10-year anniversary of the PPA would be an
appropriate time to take the next big step forward. It’s a necessary and
terrific conversation.
Personally, the most
exciting thing I see right now is that we’re really witnessing all the right
parts of the ecosystem coming together, constructively sharing real ideas with
our public policymakers. They’re coming together now with a real collective sense
of identity and purpose. It’s not just a conversation that plays out along the
lines of, ‘Hey look, we have the best product or the best idea.’ It’s much more
robust and collective than that. It’s really becoming a public conversation.
The topic of
retirement is not at the top of the list of things that people are worried
about right now, we all understand that. But it is pretty high up on the list
for most people, and it is one of the areas where you could actually see
bipartisan consensus starting to build. When I look at who really needs to be
involved in this conversation—advocates for the industry service providers, for
plan sponsors, and for consumers—all these parties are starting to get involved
and they’re talking directly to each other and to legislative leaders, so that makes me optimistic.
Q: Was there much agreement about the next steps that should be taken
by all these parties?
I think there was, to
some extent, though not as much as will be needed to galvanize new
reforms on the scale of the PPA. For
example, one of the things I spoke specifically about was this topic we have
been honing in on recently, which is ‘re-imaging
re-enrollment.’ That’s an example of low-hanging fruit in terms of things
that could be accomplished quickly, without requiring major change to the
regulatory or legislative structures.
Another example could
be increasing the portability and reducing the leakage of small balances, and making sure everyone has the right asset allocation. These things are already
being worked on under the current regulatory and legislative structure.
Thinking medium- and longer-term,
there is increasing agreement that we need to make changes to improve accessibility
to tax-advantaged savings. A lot of people at the forum expressed optimism
about open
multiple employer plans as the most likely path forward when it comes to addressing
many of these issues.
Q: Does that imply that the state governments, in a sense, are in the driver’s
seat in terms of setting retirement policy?
You know, there are a
lot of people who are hoping for a federal solution to emerge to help those people
who right now lack access to quality retirement planning options in the
workplace. But it just doesn’t seem to be happening, so another group has
become much more supportive of the state-based solutions that are slowly
starting to roll out—not because it’s a great answer to have 50 different
approaches to retirement planning. It’s not a good approach. But it’s better
than inaction in the eyes of a lot of people.
There is a real hunger
to get things going and to allow us to actually see the pros and cons of the
different approaches. There are some significant differences in the approaches
being taken by various states, so I think it will be very informative to see this
play out.
As a portfolio manager
at heart, my main concern in a lot of this is to remind people that there is a
difference between a mathematically optimized portfolio and what an average
investor is going to find emotionally satisfying. When we’re dealing with individual
investors and developing solutions for their financial problems, we absolutely
must keep this in mind. We have to come up with answers that solve the underlying
financial problems while also making sense to the user.
Q: So, given the time you have spent recently meeting with decisionmakers
in Washington, do you see building bipartisan consensus for a national-level
retirement reset reminiscent of the PPA?
Sadly, I think
consensus is still too strong a word. There is a … growing understanding that
there are gaps to fill. There is a growing understanding that there may be
lower hanging fruit, and that there are other things that are longer-term
systemic fixes that are going to need to happen.
What I do find
encouraging, again, is that all the stakeholders are starting to come together
publicly and saying, ‘Here are some answers that we want to put into place.
Let’s get to work.’ These are the pieces that have to start coming together to
really drive the conversation forward for the next decade of the PPA.