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Rich and Co.

Cautions on Retirement Income "Promises" from 401(k) Plans:Response to Fred Reish Proposals

401(k) plans and employers can neither “promise” retirement-income adequacy nor should they be asked to. 

Fred Resish in his recent piece (see here) calls for crossing some real boundaries in terms of plan sponsors and other telling employees about retirement income matters — further burdening the 401(k) plans with the imprudent burden of taking-on retirement income adequacy.  Below are some quotes from the piece and comments.

Our objections include the following:

  • Claiming 401(k) savings plans as “retirement” plans and then implicitly suggesting the goal for them of retirement-income adequacy is fraught with risk for all – and factually incorrect.
  • The Reish, and Institutional Retirement Income Council (IRIC), proposals place significant burdens on plan sponsors whilce paradoxically admitting that plan sponsors have no way to adequately advise or even collect full data to advise employees on retirement income matters.

The proposals attempt to stretch 401(k) plan capabilities, and those of the plan sponsors, beyond reasonable (and legal?) limits to meet what all are now acknowledging to be the large, multidimensional and increasingly complex challenges of retirement income. 

But, the 401(k) industry—plan sponsors, participants, providers and advisers—are beginning to realize that the real purpose of 401(k) plans is—or at any rate should be—to provide monthly income in retirement.

This is a highly controversial claim and unsupported by research.

“As a result, the government, and particularly the U.S. Departments of Labor and Treasury, are increasingly interested in retirement income. Providers and advisers are also focusing on the issue. This is due to the simple truth that, in retirement, 401(k) participants need to withdraw their money on a monthly basis to pay their mortgages, phone bills, rent, utilities, and so on. In other words, 401(k) accounts need to generate a monthly “paycheck.” “

Defined contribution plans were never designed, nor can they now be reconfigured, to meet more than a portion – perhaps a small portion – of retirement income needs.  If claimed otherwise – evidence is needed.

“Since plan sponsors in most instances do not have access to employees’ complete wage history, the Social Security Retirement Estimator calculators are more accurate in projecting future Social Security benefits. The Agencies should encourage plan sponsors to provide links on their websites to these calculators.”

In principal, this is clearly the domain of personal financial planning and advisor relationships – not plan sponsors.  Practically, it is impossible to accomplish inside of a 401(k) plans.

The proponenets of these proposals seem to be encouraging “Ready, Fire, Aim” and rushing solutions without fully analyzing the problem.  Yes, the challenge of retirement income is significant.  No, further burdening plan sponsors and DC plans with most of the responsibility will not work.

In addition, what liability do plan sponsors and providers take on by implicitly “promising” any form of retirement income?

Back the drawing boards, folks.

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Written by Rich and Co.

March 17, 2011 at 5:12 pm

Posted in Uncategorized

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