Practical Considerations and Opportunities for Financial Professionals.

Practical Considerations and Opportunities for Financial Professionals.

Recordkeepers will provide the projections for participants. However, the projections may raise more questions than they answer. The new rule says that the projections are to be based on current account balances without considering future contributions. In addition, the projections will only consider a participant’s plan account (but not other assets, such as IRAs, personal investments, or spouse’s assets). In addition, plans won’t be required to provide a benchmark for retirement adequacy.

Those deficiencies create opportunities for financial professionals. Plan advisors can work with recordkeepers and plan sponsors to provide a more robust set of services, including benchmarks, gap analysis, and calculators that can take other assets into account. Also, while the requirement to project retirement income is at least a year away as discussed later in this article, most recordkeepers already have the ability to provide those projections. As a result, plan advisors can work with employers and plan committees to adopt the practice before it is legally mandated and can educate fiduciaries that mandated projections are coming. 

Financial professionals for individuals can help their clients perform more meaningful projections and work with their clients to properly benchmark the projections (and to recommend changes if the results benchmark poorly).

For example, financial professionals can do “gap analysis” scenarios for their clients. The projections would be more sophisticated and comprehensive than those required by the SECURE Act. These projections could take into account: future contributions, other assets, future savings, and spouse’s assets. They could be projected to an individualized retirement date (rather than a standard retirement date).

Then, a financial professional could work with each client to create a personal benchmark for retirement adequacy, and the benchmark would be compared to the projections. If the comparison showed a shortfall, or a “gap,” the financial professional could work with the client to close the gap through, for example, adjusting the retirement date, increasing savings, or modifying expectations. 

This new focus on retirement benefits will undoubtedly create opportunities for financial professionals to demonstrate their skills and help their clients in important ways. In all likelihood, it will favor financial professionals who include financial planning as a part of their regular services. 

Details of the SECURE Act Provisions for Projections

Here are some of the most important considerations for the new law:

1. The projections will not be required until one year after the DOL issues all of the guidance discussed in the next three paragraphs. The SECURE Act directs the DOL to issue guidance no later than one year after the enactment of the law (December 2019). However, the DOL hasn’t said if the guidance will be out in time and hasn’t issued any proposals yet.
   
2. The DOL must issue an interim regulation with details about (i) the projection of retirement income based on account balances; (ii) how the projections will be based on periodic payments to a participant over the participant’s anticipated lifetime; and (iii) how the projections will be done for both single life expectancies and joint and survivor life expectancies.
   
3. The DOL must issue a model participant disclosure that explains that (i) the projection is only an illustration, (ii) the actual payments may vary substantially from the disclosure, (iii) the projections are based on assumptions (which must be described), and (iv) other disclosures as required by the DOL.
   
4. In addition, the DOL must prescribe the assumptions that may be used to convert the account balances into projected retirement income. 
   

If plan sponsors and fiduciaries use those assumptions and provide the model disclosures to participants, the Act has a fiduciary “safe harbor” protecting them from any liability under ERISA that could result from the projections.

If the Congressional goal is achieved, participants will begin to see their account balances as a source of monthly retirement income, rather than only as “wealth.” In that case, the role of financial professionals may change to, at the least, focus on retirement adequacy and monthly retirement income. As 401(k) plans mature, and the baby boomers grow older and retire, there will be an increasing need for quality advice about the amount of money needed for retirement and about how that money can produce sustainable lifetime income. The services provided by knowledgeable financial professionals will be more important than ever. It is one thing to invest for retirement while still making an income, but it is quite another to be living on investments as the primary source of income. These new rules are designed to increase the focus on benefit adequacy and secure retirement income.