Thursday, January 13, 2011

Don't Tell Me About Replacement Ratios

I read an article this morning and I'm not going to link you to it, but I am going to tell you that it made my teeth itch. In it, a head of research from an institutional investment house that is also a defined contribution recordkeeper said that their database shows that only X (they actually stated what X was) % of the participants in their database (the plans that they recordkeep) are on track to retire with a replacement ratio of at least 75%, which is what the head of research said is necessary for retirement.


Who said 75% is right? Doesn't that vary by pay level? How many of those people have inheritances? How many have defined benefit plans? How many have plans with other employers? How many have IRAs? How many have significant other assets?

I've gotten 'advice' in the mail from the recordkeeper of one of the 401(k) plans in which I have an account balance. It told me that I need to save more in the plan. Then, I looked at the amount that I was deferring for the year. Based on what were, at the time, my current elections (and I didn't change them during that year), I was on track to defer $22,000 to the plan ($16,500 regular contributions plus $5,500 catch-up contributions). The plan is not allowed to let me defer more than that. Period!

But, the wonderful formula used by the recordkeeper in its calculations showed that based on that plan only, I would never be able to retire if I continued to defer such a pittance. Did they know that I have vested benefits in defined benefit plans? Did they know that I have other investments? Did they know that I plan to win the lottery soon, and it will be a really big one?

I am supportive of communications to plan participants that encourage saving. But, this is ridiculous. The good news is that most plan participants are not informed enough to understand why these communications may be wrong. The good news is that the communications, no matter how faulty, often cause plan participants to save more.

I guess my beef is with the improper usage of data and statistics. The fact is that many defined contribution consultants, communication experts, and even heads of research for these firms, do not have sufficient training in data handling and statistics to make these statements and to give this advice.

When I become Congress and President (likely not in this lifetime), I am going to pass a law that the misuse of data and statistics resulting in citing some outlandish outcome is a felony punishable by ... something that will be as annoying to the misuser as their misuse is to me. So, if they don't understand what they are saying, I wish they would keep it to themselves.


  1. I'll confess to helping draft similar communications. Among the participant population a plan sponsor is trying to reach (sorry, you're not one of them) adding the illusion of statistical validation is actually useful.

    Sort of like those compound interest examples that leave out the 2008-2009 market returns.

  2. Ron, I appreciate the comment. I wish I knew which Ron you are, not so that I could call you out, but so that I could discuss with you offline.

    Frankly, I chose these statistics to pick on because they were top of mind, but the fact is that only a small percentage of people who cite and use statistics and probabilities in their communications have any idea what they mean.

    Thanks for reading.