Lowell points out that when actuaries do forecasting for defined benefit (DB) plans, they do not look at one set of assumptions; they model multiple scenarios. If the DB plan sponsor is risk-averse, it would look at the poorer outcomes and hedge against them.
Lowell says the same can be done with DC planning models. “The model I would like to see is one in which people are able to input their own individual best estimate of what they think they will do, and the model will perform various scenarios,” he says.
“I’m suggesting a model that doesn’t just show a scenario based on a participant’s input and say ‘Yeah you’re good,’ or ‘No you’re not,’ but one that starts with reasonable expectations, and shows a participant all realistic outcomes,” Lowell adds. “The model will tell a participant what percentage of time they will be in good shape and how often they won’t, as well as what they can do to minimize the percentage of times they are not in good shape, such as change asset allocations. It is OK for a model to use questions like, ‘Do you anticipate work stoppages or periods of time where you will have to stop or lower deferrals?’”
Lowell concedes this is not an easy model to build, but it is “doable.” He says, “If it can be done for DB plans, it can be done for DC plans.”
Until such a model exists, Carrington says it is a great challenge in the industry to help people piece together the complex retirement puzzle. “We have to start talking to participants about the challenge,” he says. “Rather than simply discussing only their DC assets, or only their resources and not their household’s, we need to discuss the more complex picture. This takes a combination of models, advice and communication to make participants aware of the reality.”
Carrington adds that financial wellness is important as well, because it helps people look at budgeting at the household level and issues such as addressing debt. It helps participants address challenges when their savings behaviors do not fit a model’s assumptions. NEXT: How can plan sponsors help?