Saturday, January 30, 2010

Projection Screen?

More than the subtleties of the law, the nuances of crafting a cogent legal brief, and the humiliations that often accompany the public exercise of the Socratic method, surely the most intimidating aspect of my law school experience—certainly in the first year—was the grading. In the vast majority of my classes, there were no papers, no mid-term, no pop quizzes; in fact, no tangible means of measuring progress vis-à-vis the expectations of the course. Indeed, in the vast majority of courses, it came down to a single final exam (and an essay exam at that).

Now, there were regular (and, as I recall, fairly prodigious) reading assignments—and there was the omnipresent “fear” of being called on to explain the legal intricacies of a particular case—but, for the very most part, lacking any specific interim evaluations, there were weeks when the press of external events intruded. It was, for some of my classmates, particularly in that critical first year, easy to postpone their preparation until a later day.

Procrastination, of course, is an all-too-common failing of human beings, particularly when it comes to complex financial matters. Indeed, IMHO, too many retirement savers (and certainly most retirement nonsavers) save based on what they think they can afford or on what their employer matches, rather than on the income that savings will generate when they are no longer drawing a paycheck.

While there are any number of innovative calculators and communication devices available at present, they still seem to work best for participants who are willing to take the time to use them. But late last year, lawmakers (specifically, Senators Jeff Bingaman (D-New Mexico), Johnny Isakson (R-Georgia), and Herb Kohl (D-Wisconsin)) introduced legislation that would require defined contribution plan sponsors to inform plan participants of the projected monthly income they could expect at retirement, based on their current account balance (see Bill Would Require Disclosure of Participants' Expected Retirement Income).

Now, as a general rule, I’m leery about government-mandated disclosures, which tend to cost more and inform less than their erstwhile sponsors surely intend (“of the lawyers, by the lawyers, for the lawyers” is how they usually seem to turn out, IMHO). But this could well be an exception.

The sponsors of the Lifetime Income Disclosure Act have directed the Department of Labor to issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure—and they have provided that employers and service providers who rely on those materials would be insulated from liability arising from those disclosures.

There will, of course, be some issues. The legislation outlines assumptions that include payment as a joint and survivor annuity, and that each participant has a spouse of their same age—assumptions that certainly won’t apply in every case. It may well be that the model disclosure—though the legislation directs that it be able to be “understood by the average plan participant”—will wind up being an unintelligible morass of caveats and conditions (yes, “of the lawyers, by the lawyers, for the lawyers”). It is possible that the costs of preparing and producing that communication will countermand their benefit. It is even conceivable that seeing that particular number in black and white will only serve to undermine, not inspire, a greater appreciation for these programs (projections in a similar vein years ago didn’t do much to inspire an appreciation for my pension benefits).

That said, decades of saving for retirement is for naught if it fails to provide income for retirement, and the challenge of getting to retirement on a limited budget surely pales in comparison to the challenges of trying to get through retirement with those strictures. Knowing how much your current savings level might actually produce in retirement income dollars may only be part of that equation, but, IMHO, it’s a critically important component. Like any meaningful long-term savings goal—a house, a car, a college education—you need to know the target if you are to have a chance of hitting it. And seeing a clear, consistent estimate of what your current savings will amount to post-retirement seems to be a positive step in that direction.

To paraphrase Yogi Berra, if you don't know where you are going, you might wind up someplace else. And for tomorrow’s retirees, that could be a failing grade.

—Nevin E. Adams, JD

More information on the Lifetime Income Disclosure Act is available at http://www.plansponsor.com/Bill_Would_Require_Disclosure_of_Participants_Expected_Retirement_Income.aspx

http://bingaman.senate.gov/policy/erisa.pdf

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