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lifetime income illustrator


Tom Poje

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one of the items our good friends at the govt are 'talking' about requiring is an illustration for a participant of a lifetime income illustration.

enclosed is sample statement (or at least an attempt just to see how this would work) which comes close to matching the sample provided by the govt at

http://www.askebsa.dol.gov/lia/

govt assumptions:

How the Calculator Works

The calculator uses the safe harbor assumptions described in the ANPRM for estimating future contributions, investment earnings, and inflation:
Contributions continue to Retirement Age at the Current Annual Contribution amount increased by 3 percent per year.
Investment returns are 7 percent per year (nominal).
An inflation rate of 3 percent per year is used for discounting the projected account balance to today's dollars.

In converting the account balances into lifetime income streams, the calculator uses the safe harbor annuity conversion assumptions described in the ANPRM:
A rate of interest equal to the 10-year constant maturity Treasury securities rate for the first business day of the last month of the period to which the statement relates (equal to 1.63% as of December 3, 2012 for statement periods ending December 31, 2012).
The applicable mortality table under section 417(e)(3)(B) of the Internal Revenue Code in effect on the first day of the last month of the period to which the statement relates. This is a unisex table (i.e., the annuity values are the same for males and females

ok, so the enclosed statement is hardcoded at ret age 65 (thus the income at ret is simply divided by 200, and joint/survivor 221.81, to keep things simple)

(By the way, the govt illustration adds 1/2 year to future years - this statement does not)

of course the govt is asking for comments

I suppose one possible comment would be: you take the contribution and project a 3% increase each year. so if the person received 50,000 this year, then the projection would be 51,500 for the following year, which of course would be over the 415 limit. so just how is a cap to be built into the formula?

statement with projection.rpt

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of course the govt is asking for comments

"Don't you have anything better to do than this? Like write the statement regs that were required under PPA within 1 year (or was it 6 months)?"

Ed Snyder

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The record keeper for our plan has already begun including this information on statements. The amount they projected for my monthly benefit seems extraordinarily high. A participant who had no idea how they came up with that figure could easily decide that he or she no longer needed to save anything since the projected benefit looked so good. I believe that is exactly the opposite of the intended result.

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No "Monte Carlo" simulation to show the range and probability of outcomes? Is that no longer the big rage in planning software? (Don't get me started on using the name of a place associated with casinos and gambling to make retirement projections.)

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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I'd be happy to have a guaranteed 7% return.

I just through this together the other day, so we haven't sent anything out, probably won't until it is required.

I haven't added the blurb about "this is an estimate only...."

and of course, this is simply another piece of info in the participants hands along with all the other stuff they are suppose to receive.

I wonder who the burden is going to fall on, the TPA or the invetsment house to provide this piece of info. And if it is not provided, then what.

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ESOP Guy:

you mean the DOL's comments in the proposed regulation about avoiding potential lawsuits aren't reassuring to you?

As to the concern about potential lawsuits based on unrealized expectations, the Department believes this issue might be addressed in two ways. First, benefit statements could
include a clear and definitive statement that the lifetime income illustration is an estimate, based on specific assumptions, and not a guarantee. The Department believes this disclosure
would serve to put participants and beneficiaries on notice that the illustration is only an estimate and, thereby, minimize the likelihood that they would believe the illustration is a
promise or guarantee. The Department specifically requests comments on the extent to which the language in ANPRM § 2520.105–1©(6) would accomplish this result. Second, the Department is
considering establishing a regulatory safe harbor under section 105 of ERISA for plan administrators to rely on when developing lifetime income illustrations for pension benefit statements. By
specifying the precise standards and assumptions a plan administrator would use to make a lifetime income illustration on a pension benefit statement, a regulatory safe harbor
would substantially reduce the likelihood of lawsuits against that administrator based on an imprudent or improper calculation of lifetime income.

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Tom - I think, as TPA's, we probably all know in whose lap the responsibility is likely to fall...

Now it is time to rant a little bit.

My own feeling is that the DOL should require only a website URL/LINK on the statement that refers them to the DOL website for the calculator. Then the DOL can have whatever assumptions they want on the calculator, as well as any disclaimer language, and the statements can have just a canned statement, developed by the DOL. This stuff about requiring the payment amounts on the statements is utter foolishness, and in my own cynical view, is being pushed (under the guise of helping participants) by those who have or will obtain a financial stake in lifetme payouts, as well as some well-meaning but sadly misguided do-gooders. I hasten to say that I have no evidence whatsoever to back up my cynicism.

The simple fact is, whether you like it or not, that most participants in DC plans don't want, and will never take, a lifetime monthly payout option!

Rant over. For now.

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My own feeling is that the DOL should require only a website URL/LINK on the statement that refers them to the DOL website for the calculator. Then the DOL can have whatever assumptions they want on the calculator, as well as any disclaimer language, and the statements can have just a canned statement, developed by the DOL. This stuff about requiring the payment amounts on the statements is utter foolishness, and in my own cynical view, is being pushed (under the guise of helping participants) by those who have or will obtain a financial stake in lifetme payouts, as well as some well-meaning but sadly misguided do-gooders. I hasten to say that I have no evidence whatsoever to back up my cynicism.

Amen. And just for the record, I am supremely disappointed that ASPPA has not come out squarely against this nonsense. We (they) seem to be going along for political reasons and I think it's a mistake.

Ed Snyder

Ed Snyder

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ESOP Guy:

you mean the DOL's comments in the proposed regulation about avoiding potential lawsuits aren't reassuring to you?

As to the concern about potential lawsuits based on unrealized expectations, the Department believes this issue might be addressed in two ways. First, benefit statements could

include a clear and definitive statement that the lifetime income illustration is an estimate, based on specific assumptions, and not a guarantee. The Department believes this disclosure

would serve to put participants and beneficiaries on notice that the illustration is only an estimate and, thereby, minimize the likelihood that they would believe the illustration is a

promise or guarantee. The Department specifically requests comments on the extent to which the language in ANPRM § 2520.105–1©(6) would accomplish this result. Second, the Department is

considering establishing a regulatory safe harbor under section 105 of ERISA for plan administrators to rely on when developing lifetime income illustrations for pension benefit statements. By

specifying the precise standards and assumptions a plan administrator would use to make a lifetime income illustration on a pension benefit statement, a regulatory safe harbor

would substantially reduce the likelihood of lawsuits against that administrator based on an imprudent or improper calculation of lifetime income.

No I am not reassured.

Although my thinking is a little more then that. I have been around long enough to have seen that for many people once you put a number on paper it becomes reality to them. I have sent MP Plan distribution forms with estimated annuity payments and when the person asked the client to go price an annuity and it comes in even different by $20/mo they blow up and start to demand why it isn't as large as what was on the form. (They never ask when the actual number is larger of course.) Even if they don't sue the issue is still very time consuming. Now imagine if the number of annuity estimates go from rare to common. Even if no one gets sued I can imagine lots of conversations on why estimates made just back in 2007 aren't coming true now in 2013. They have the projection in writing you know!

Then if enough noise is made like I said there will have to be rules about these projections to protect people from making their life plans off of them.

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ESOP - my comment was meant to be tongue and cheek, but I forgot to add a smily face.

the notes on the DOL instruction are even scarier

"This calculator uses a simplified computation (e.g., annual contributions, mid-year retirement). Depending on the comments received in response to the ANPRM, the next version of the calculator may provide a more precise computation (e.g., monthly contributions, retirement in a specified month)."

(they expect things broken out by monthly contributions????)

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silly me. no wonder I couldn't duplicate the DOL numbers. for instance, to make an initial 10,000 contribution work, you have to plug in 9708.74 which is 10,000 / 1.03.

I modified my test sample statement so it prints on a separate page, with a blurb describing the projection and 'this is an estimate only', etc. but didn't attach it yet.

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