Putnam expresses concerns about income illustration ruleNews added by Benefits Pro on July 31, 2013
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By Paula Aven Gladych

Putnam Investments has come out in support of the Department of Labor’s proposed rule regarding lifetime income illustrations on 401(k) account statements – with plenty of reservations, however.

The giant 401(k) plan provider already helps plan participants estimate what their savings will net them on a monthly basis when they retire, and is worried that rules that are too stringent will derail what it already has in place.

“We do have concerns that the rule proposes a highly standardized approach that, among other factors, utilizes a fixed retirement age and investment rate of returns that are not based on the actual asset allocation of participant accounts,” Putnam said in a letter to the DOL. “We are also concerned by the exclusion of Social Security benefits and outside retirement assets from the proposed projection.”

The company added that it also was concerned that the only allowable approach for converting balances to income was annuity-based.

“Since the vast majority of participants do not annuitize their retirement savings at retirement, this conversion approach provides a number that may not be relevant to most participants’ experience,” the company said.

The DOL’s proposed annuity-based conversion process is unlikely to generate an accurate income estimate because it is based on current interest rates, Putnam said. It is unlikely those rates will remain the same in 20 or 30 years. The annuity conversion method also doesn’t include costs, which can be a problem.

Putnam included several recommended changes to the DOL’s proposed rules, including:
  • Allowing greater flexibility in income projection and balance conversion methodologies to enable greater personalization for participants.

  • Avoiding the establishment of rigid safe harbor methodologies and assumptions that could calcify into de-facto industry standards and potentially undermine current and future innovation by providers intended to help participants estimate their income in retirement.

  • Eliminating the requirement that an income amount be reported on the participant’s current balance. “We view this as largely meaningless to most participants and likely to shift focus away from their long-term savings plan and toward their current balance. We believe that this would be a step in the wrong direction,” Putnam wrote.
Putnam developed a Lifetime Income tool in 2010. It allows participants to “experience and interact” with their retirement savings plan and provides a personalized estimate of the participant’s retirement savings plan including current balances, future employee contributions and company matches and projected Social Security benefits. Outside retirement savings also are factored in.

Through its own efforts, Putnam said it has learned that participants better understand and respond to monthly income retirement stated in current dollars than to a simple statement of total retirement plan balances and allocations. It also believes that while estimates are not always precise, they can and should be personalized to individual circumstances to provide meaningful information to participants.

Thirty percent of participants who use Putnam’s Lifetime Income Analysis Tool change their deferral rate and eight out of 10 increase the amount they are saving. On average, deferral rates among such participants have increased by 18 percent.

Originally published on BenefitsPro.com
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