71 South Wacker Drive tel 312-780-7100

Suite 2040 fax 312-780-7159 www.russell.com

Chicago, IL 60606 toll-free 877-500-1298

August 13, 2010

To: Office of Regulations and Interpretations

Employee Benefits Security Administration

Attn: Lifetime Income Joint Hearing, Room N-5655

U.S. Department of Labor

200 Constitution Avenue NW

Washington, DC 20210

From: Josh Cohen, Defined Contribution Practice Leader

71 S. Wacker Drive, Suite 2040

Chicago, IL 60606

312-780-7116

jrcohen@russell.com

Bob Collie, Managing Director, Investment Strategy and Consulting

909 A Street

Tacoma, WA 98401

253-439-2474

rcollie@russell.com

RE: Request to testify at the Lifetime Income Joint Hearing

September 14, 2010, 9:00 a.m. EST

Russell Investments, a Tacoma, Washington based consulting and asset management firm, would

welcome the opportunity to testify at the Lifetime Income Joint Hearing of the Department of Labor

and the Department of Treasury on Tuesday September 14, 2010 at the U.S. Department of Labor in

Washington, D.C.

Russell Investments provides strategic advice, state-of-the-art performance benchmarks and a

range of institutional-quality investment products to U.S. and international clients including individual,

institutional and advisor clients in more than 40 countries. Russell has more than $140 billion in

assets under management as of June 30, 2010; Russell Indexes have $3.9 trillion in assets

benchmarked to them as of December 31, 2009; Russell advises on $903 billion as of

December 31, 2009.

This business portfolio and reach provides Russell with direct knowledge, understanding and insight

that we believe would be relevant and beneficial to the Department of Labor and the Department of

the Treasury as these agencies further consider issues related to providing lifetime income to

participants and their beneficiaries after retirement.

As a consultant to defined contribution fiduciaries and as a provider of services to defined

contribution participants, Russell recognizes the need to provide products and solutions to help

participant manage the various risks they shoulder at retirement, including longevity, market, and

inflation risk. Our expertise in capital markets, asset allocation and liability management provides us

with unique insights into this issue.
Russell has already contributed to this discussion through our participation in, and input to industry

group responses, specifically the Defined Contribution Institutional Investment Association (DCIIA)

and the Institutional Retirement Income Council (IRIC). I, Josh, also proudly testified at the Joint

Hearing on Target Date Funds in 2009, which I believe is leading to outcomes to help the broader

effort of providing greater retirement security for the American worker.

While there are many important issues, during the upcoming hearing Russell specifically requests to

testify on topics related to question 3, “Disclosure of Account Balances as Monthly Income

Statements”. This is an idea that Russell has promoted for many years. I, Bob, and my colleagues

Don Ezra and Matthew X. Smith wrote specifically about the need for such reporting in a recent

book. Here is a brief excerpt.

An individual participant in a 401(k) plan has been accustomed to seeing a statement that

might say: ‘You have saved $50,000.’ A DB plan participant, in contrast, might see ‘You have

accrued an annual pension of $5.000.’ As the DC focus shifts to income replacement, the

accrued value figure will need to be supplemented with more information – information that is

relevant to what the plan is there for, perhaps something like ‘This $50,000 is likely to provide

you with about $X in monthly income, which should be enough to replace about X% of your

salary, if you retire at age 60.’

From The Retirement Plan Solution: The Reinvention of Defined Contribution by Don Ezra, Bob Collie and

Matthew X. Smith (John Wiley & Sons, 2009) pages 15-16.

The full section from which that is taken, and an example of the specific information that such a

statement might include (taken from later in the same book) are appended to this letter.

We understand how critical the assumptions used to make these projections are. Russell

highlighted this in a 2008 paper titled “Will I Have Enough to Retire?” (this paper is also appended to

this letter). In that paper, we demonstrate the vastly different projections that can be derived from

different retirement planning tools.

Finally, we are informed about these very issues as a Superannuation provider in the Australian

Defined Contribution Market. Last year, the Australian Securities and Investment Commission

(ASIC) developed regulations regarding providing these forecasts, which dealt with many of the

same issues that have been raised in your request.

Our testimony would include the following key points:

1. Need for Income Based Reporting (1 Minute)

a. Discuss why we believe participants are in great need of this type of reporting.

2. The Case for Standardization (2 minutes)

a. Review the consequences of not standardizing

3. Accrued versus Projected Balances (2 minutes)

a. Accrued balances should be the primary foundational starting point but with flexibility

to show projected balances based on certain standard approaches.

4. Recommendations Regarding Other Assumptions (3 minutes)

a. Contribution Rate

b. Return

c. Interest Rate

d. Mortality Rate

e. Quantifying Uncertainty
We hope to hear from you soon regarding the opportunity to testify at the Lifetime Income Joint

Hearing on September 14. Our contact information is provided. Thank you for your consideration.

Sincerely,

Josh Cohen

Russell Investments

Defined Contribution Practice Leader

71 S. Wacker Drive, Suite 2040

Chicago, IL 60606

312-780-7116

jrcohen@russell.com

Bob Collie

Russell Investments

Managing Director, Investment Strategy and

Consulting

909 A Street

Tacoma, WA 98401

253-439-2474

rcollie@russell.com

Attachments:

Excerpts from The Retirement Plan Solution: The Reinvention of Defined Contribution. Don Ezra,

Bob Collie, Matthew X. Smith. (John Wiley & Sons, 2009.)

Will I Have Enough to Retire? William Madden. (Russell Research, 2008).
Excerpts from:

• Income Replacement: pages 15-17

• Sample Participant Statement: pages 130-132




Russell Investments // Will I have enough to retire?

By: William Madden, Senior Investment Strategist 

MAY 23, 2008 

ìWill I have enough to retire?î 

Research shows answers vary widely depending on the investment 

calculation tools used 

A number of tools are currently available to allow individual participants 

in defined contribution (DC) plans to measure their progress toward a 

secure retirement. In this research article, we examine the outputs of five 

such tools and find significant differences in the conclusions they reach. 

How do participants know if their savings are on track? 

Since 401(k)s and other defined contribution plans are now the main sources of retirement 

savings for a majority of private sector workers in North America, increasing attention is 

being paid to tracking the progress of DC accounts toward meeting retirement goals. 

Most DC recordkeepers and investment providers have calculators or models which allow 

a participant to estimate how savings stack up against retirement goals. We refer to this 

process as on-track reporting ñ the process designed to help participants answer the big 

question, ìWill I have enough funds to meet my retirement needs?î 

A retirement goal is often expressed as a percent of final salary (the rule of thumb used 

most often seems to be 70-85%) but it could just as well be an estimate of retirement 

expenses ñ a budget. 

Although the principles involved in developing tangible retirement goals and comparing 

them to oneís savings today are unambiguous, depending on the vendor, results from 

various on-track reporting tools can be very different, if not confusing. 

Case study: Comparing five models of on-track reporting 

For purposes of comparison, we ran simple retirement calculators or models from five 

providers ñ using the same data for the following hypothetical participant: 

Sharon - Hypothetical participant 

Age: 47 Current salary: $45,000 

Years to retirement: 20 Annual Salary Growth: 3.0% 

Current DC balance: $54,000 Projected investment return: 7.0% 

Contributions: 

 Employee: 4% of pay 

 Employer: 2% of pay 

Individual 

investors canít 

afford to be 

confused about 

retirement 

security. 
Russell Investments // Will I have enough to retire? / p 2 

Result summary: Models 1-51

1. The first report said that Sharon needed $910,280 at retirement and that, with her current 

rate of savings and earnings, she would be only $9,500 short of this goal. On this basis, she 

has a sound plan, and only needs to save a bit more to be exactly ìon track.î 

2. The next calculator showed that at retirement, Sharon would need $3,188 per month in 

todayís dollars and that her current balance and projected contributions would only yield 

$2,200 per month. 

3. This model reported that Sharon had a 95 percent chance of being able to spend 

$15,000 in todayís dollars per year at retirement. 

4. According to this report, at retirement, Sharon would be short anywhere from $676,000 

(given poor markets) to $444,000 (given average markets) of a total retirement goal of 

$945,000. 

5. The final model projected an $859,400 shortfall at retirement and would require Sharon 

to save an additional $21,000 per year (about 44% of Sharonís current salary) to make up 

the difference. 

Explaining some of the differences 

The table following restates the output for each of the models in terms of income 

replacement at retirementónote that Sharonís final salary is projected to be $81,275. The 

principal differences are as follows: 

• Models 1 and 2 incorporate Social Security, while 3, 4 and 5 do not. 

• Model 5 bases retirement income on the growth of todayís account balance, ignoring 

future contributions 

• Models 3 and 4 are based on simulations of ranges of market outcomes. This is very 

helpful in assessing the chances of meeting oneís retirement goals. 

Projected retirement needs and expected income 

Annual amounts in dollars at retirement 

 Model 1 

80% 

replacement 

Model 2 

85% 

replacement 

Model 3* Model 4 

83% 

replacement 

Model 5 

94% 

replacement 

Amount needed at 

retirement 

$65,020 $69,100 - $67,500 $76,310 

Social Security (20 years) ($39,120) ($33,510) 0 0 0 

 

Net needed $25,900 $35,590 $27,090 $67,500 $76,310 

Retirement income from 

current and future savings 

$25,220 $14,260 $27,090* Poor Markets Avg. Markets 

 $19,210 $35,290 

$14,930 

 

Shortfall $680 $21,330 - $48,290 $32,310 $61,380 

 

1

 Note that all five of these models provide fairly simple approaches to retirement planning. Many more 

comprehensive systems are available which allow for inclusion of non-retirement assets, health insurance, taxes, 

treatment of longevity issues, decumulation, etc. Russell does not have a proprietary interest in any of the models 

used as part of this case study or use them on a regular basis. Additional simulation descriptions for Models 3 and 4 

are highlighted on page 4. 

*Model 3 does not have an income replacement target, but calculated that Sharon would have a 95% likelihood of 

reaching an annual amount of $27,090óequivalent to 33% income replacement. 
Russell Investments // Will I have enough to retire? / p 3 

What are the factors that matter most? 

Despite these differences in the basic output, on-track reporting is an important part of a 

sound retirement planning process. Each of the systems we tested can provide valuable 

information over time to individuals in DC plans. However, there are a number of points that 

users of these retirement models need to keep in mind. Among the most important are: 

1. UNDERSTANDING THE UNDERLYING PROJECTIONS AND CALCULATIONS 

Participants should understand how the calculator (or any planning tool) works ñ how 

estimates are developed and what is included or excluded before acting on the results. 

Similarly, if plan sponsors offer modeling tools from an advisor or provider to help 

participants plan for retirement, itís important to understand the toolsí underlying 

assumptions and to clearly communicate this information to participants. For example, 

the $61,380 annual shortfall of Model 5 is nearly 100 times the $680 annual shortfall of 

Model 1óa huge differenceódue to different treatments of Social Security benefits and 

future DC contributions. 

2. DETERMINING THE NEED AT RETIREMENT 

All of these models use a percent of final salary as a rule-of-thumb to determine retirement 

needs. This is a convenient method of estimating retirement income, but it may be quite 

different from oneís actual expenditures or even different from oneís own assumptions 

about replacement income. 

Another approach is to prepare a consumption budget by downsizing todayís spending 

patterns, but including expenditures unique to retirement. Laurence Kotlikoff points out that 

a target of 70% to 85% of final salary, in many cases, is more than what is needed to 

support retirement needs. For more details on Kotlikoffís assumptions and observations, 

see his article, ìEconomicsí Approach to Financial Planning.î 2

3. PROJECTING ASSET RETURNS ñ CONSTANT OR VARIABLE? 

Projecting total assets based on a constant asset return over your working career leads to 

one very easy to understand answer. But what if actual returns are worse than the 

assumption? You only have one retirement to plan for and you donít want to get it wrong. 

It is important to demonstrate the risk of a particular investment program by calculating at 

least a ìpoorî outcome along with the straight line average. Many systems use more robust 

risk measures incorporating simulation. 

4. FREQUENCY OF REPORTING 

An on-track reporting system should be part of (preferably the lead page) of a benefit 

summary package for participants. Retirement needs and projected income from current DC 

balances should be compared at least annually. Changes in excess or shortfall from one 

period to the next should be explained by either changes in future retirement needs or 

changes in current and projected savings. This is analogous to explaining changes in 

defined benefit pension plan surplus by increases/decreases of liabilities or assets. 

Conclusion 

For many individual investors, the simple question, ìWill I have enough to retire?î is not 

easy to answer. A number of calculators and ìon-trackî reporting tools offer some 

guidanceóbut the wide variety of outputs they provide can be confusing. Itís important for 

individuals to understand the factors impacting their savings and ìon-trackî status. Investors 

canít afford to be confused about retirement security. 

 

2

 Kotlikoff, Laurence J. ìEconomicsí Approach to Financial Planning.î Journal of Financial Planning. 

 November 8, 2007. 
Russell Investments // Will I have enough to retire? / p 4 

Simulation descriptions ñ Models 3 and 4 

Model 3 places an individual on the glide path of a target date fund based on his or her 

current age. Monte Carlo simulation is used to estimate the final retirement fund values. 

Model 3 does not include Social Security income or simulate outcomes relative to an 

income replacement target. It provides an estimate of retirement income based on current 

assets, contributions and simulated returns. 

Model 4 asks users to choose an investment style preference, varying from conservative 

to very aggressive. Each level is associated with a target return. For our trial, a target return 

of 7% was selected. Given the target return and the standard deviation around it (based 

on a combination of equity and debt investments), Model 4 estimates average and poor 

outcomes. 

Russell Investments offers defined contribution solutions designed to provide better outcomes for participants. 

Our broadly diversified target date, target risk and asset class investment products offer participants access to 

some of the worldís best money managers. 

Russell also provides a range of services including glide path and allocation advice, target date plan default 

options, single asset class, commingled and separate account solutions to help meet the unique needs of 

DC plans. 

For more information about our defined contribution services: 

Contact your Russell representative, call Russell at 800-426-8506 or 

visit www.russell.com/dcinsights 

Important information 

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, or an opinion regarding the 

appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be 

acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. 

Russell Investment Group, a Washington USA corporation, operates through subsidiaries worldwide, including Russell Investments, and 

is a subsidiary of The Northwestern Mutual Life Insurance Company. 

The Russell logo is a trademark and service mark of Russell Investments. 

Copyright © Russell Investments 2008. All rights reserved. This material is proprietary and may not be reproduced, transferred, or 

distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty. 

First used: May 2008 

USI-0672