One of the best things to come out of the SECURE Act of 2019 is the requirement that plan sponsors “give savers a realistic illustration of how much monthly retirement income they might expect to buy with the balance. of their account “.
Shifting the focus from 401 (k) balances to monthly income could give participants a much better idea of how much of the required expense their 401 (k) accruals can cover once they stop working. The hope is also that if they see the connection between saving and income in retirement, people could make better savings decisions.
Indeed, a 2013 study published by the Center for Retirement Research reported on a field experiment that tested the effect of retirement income projections on savings decisions, involving 17,000 employees of the University of Wisconsin. The study found that providing individuals with retirement income projections, along with related material on retirement planning, modestly increased savings at very low cost.
On August 18, 2020, the Ministry of Labor published an interim final rule on the mechanisms for moving from balances to life income. The rule’s publication in the Federal Register on September 18 triggered a 60-day comment period. While such a conversion of account balances to life income is more difficult than it looks, the DOL appears to have bet on it. The agency could provide more useful information.
The concept of lifetime income illustrations is not new. In 2013, the DOL solicited comments on a possible requirement to include life income measures in participants’ benefit returns. The DOL offered two screenings.
The first was the income that participants’ current account balances would provide if they were now at normal retirement age.
The second is the income they would receive in retirement assuming their current balance would increase with future contributions and returns on their investments.
In terms of withdrawals, the proposal assumed that participants would use their money to purchase an actuarially fair annuity, that is, an annuity priced for the average individual (as opposed to those whose parents are deceased. in their 90s) and without marketing and administration costs.
The proposed rule for 2020 would provide an illustration only for current balances, and would not offer an estimate that incorporates future income or contributions. That is, the illustration of lifetime income would be based on the current value of a member’s account; assumes payments start immediately (even if a member may not be near retirement age); and assumes that the participant is at least 67 years of age. The results would be expressed both as a stream of lifetime payments to the member and a stream of lifetime payments for the joint life of the member and a spouse.
Apparently, the DOL wanted to avoid the difficulty of establishing assumptions or defaults for future contribution and investment income rates (or, perhaps, requiring plans to feature multiple lifetime income illustrations), so that the agency took a simpler approach of assuming no future contributions or investment income. The problem is that the resulting illustrations are unlikely to be of use to participants who aren’t about to retire.
The DOL knows it was a blow of the boat. In the preamble, the agency noted that many plans and recordkeepers currently make life income calculators available that are more “interactive, stochastic, and tailored to the individual plan and the plan participant,” and the DOL “encourages the continuation of these practices. “
You could say that precise calculations of future lifetime income are too difficult, so any information would be misleading. However, such a dismissal would be a mistake. Although any calculation involves a number of assumptions, a reasonable estimate is better than a nonsense number.