The Government Accountability Office (GAO) has been looking into replacement rates — and it’s got some suggestions for the Labor Department.
The GAO report, prepared at the request of Senator Patty Murray (D-Wash.), Ranking Member of the Senate Committee on Health, Education, Labor and Pensions, and Rep. Robert C. “Bobby” Scott (D-Va.), Ranking Member of the House Committee on Education and the Workforce, says that the agency had been asked to review what consumption looks like in retirement and how replacement rates are defined, calculated and used to assess retirement preparedness.
While it’s not exactly news to those who work with retirement plans, GAO’s analysis of the literature found that calculating an appropriate replacement rate can be complex, citing debates over factors such as whether households that have raised children should target a lower replacement rate than households that have not, or whether a worker’s pre-retirement earnings are defined as earnings at the end of the worker’s career or as average earnings over the course of the person's career. Complicating those determinations further, GAO cited data demonstrating wide variations in household spending patterns, variations that they said had “implications for the resources households need to maintain their standard of living in retirement.”
Tool Replacement?
Those matters notwithstanding, the report points to the information and tools on replacement rates that the Department of Labor provides, saying they “may be too limited to help workers understand how to use such rates for retirement planning.” The report explains that while EBSA’s materials note that a target replacement rate can vary based on individual circumstances, “they do not include specific examples of demographic groups that research indicates can result in higher or lower income replacement needs, or how much a replacement rate might need to be adjusted for those groups or for other individual circumstances.” Without additional information, GAO says, workers may not understand how to adjust target replacement rates when planning for retirement.
The GAO report states that EBSA’s worksheet and online tool for calculating how much to save use a default replacement rate with no opportunity for a user to adjust the rate based on individual circumstances, noting that, “Without the ability to adjust the replacement rates used in planning tools, workers may over- or under-estimate how much they need to save for retirement.”
The report recommends that DOL should provide additional examples and guidance on using a replacement rate for estimating retirement savings needs in its planning tools and modify the planning tools so the rate can be adjusted.
As for the Labor Department’s response? GAO notes that DOL generally agreed with its recommendations, and plans to add information and provide options for adjusting replacement rates in its planning tools by June 2017.
