Retirement account owners have long had trouble turning their 401 (k) money into income. That is about to change. By the end of this year, possibly in the third quarter, plan sponsors will be required to include two illustrations of lifetime income on participants’ pension benefit statements at least once a year. In essence, the illustrations show how much income a participant’s account balance in today’s dollars would produce if it were used to purchase a single life annuity or a qualified 100% survivor joint annuity.
And some praise the new rule, despite the deficiencies of the Department of Labor’s interim final rule, which was required as part of the Readiness of All Communities for Retirement Enhancement Act (SECURE). The final rule, when it goes into effect, should help those saving for retirement not only better understand how much income they will receive from their 401 (k), but it will also give people a pretty good idea if all of their sources of income are in retirement (for example, Social Security and defined benefit plans) will be enough to cover your anticipated expenses during retirement. On paper, everything sounds great. The defined contribution industry, in general, is in favor of the lifetime income artwork idea, said Drew Carrington, senior vice president and head of institutional defined contribution at Franklin Templeton Investments. “It helps frame savings and 401 (k) plans in the right terms,” he said. “This (the 401 (k)) is here to provide income when I’m retired. And this is one way to start communicating about your 401 (k) balance in those terms, as opposed to more wealth-oriented terms. So, we think everything is fine. Anything that helps start the process of getting people to think of their retirement accounts as retirement accounts is a positive step. “Others have a similar point of view. Helps” workers focus on the future and the quantity of income they may have for retirement, rather than their current or projected future account balance, “said Stacy Schaus, CEO and founder of Schaus Group.” Appropriate steps are being taken to improve the security of retirement. “Social Security, by way of background, provides potential beneficiaries with an estimate of monthly income at various claim ages in today’s dollars. The same is true for defined benefit plans. Participants generally have an idea. of the amount of monthly income they can expect to receive, in the form of an annuity, from their pension plan.IRA and 401 (k) account owners have always had the ability to In order to translate the amount of income they could expect to receive from their 401 (k), it just required them to do some calculations and you wouldn’t want to plan the rest of your life based on those calculations. Multiplying the account balance in your 401 (k) and / or IRA by 4% was and is the easiest way to do it. So for example, if you had $ 1 million in your retirement account, you could expect that to bring in $ 40,000 a year in today’s dollars. This, of course, is a very simplistic example. It doesn’t really take into account contributions, investment performance, retirement date, inflation rates, etc. But it is a rough way to determine how much income your retirement accounts would generate. And now the Labor Department wants to make that calculation even easier, although it plans to use different math. As the rule is currently proposed, plan administrators would show participants how much income they could expect from their ERISA-governed retirement account first, such as a single life annuity; and second, as a qualified joint and survivor annuity that takes into account a survivor benefit. These illustrations of monthly income would use prescribed assumptions, such as the participant’s marital status and assumed age at the start of the annuity, the Department of Labor noted in its fact sheet. Checking Account Balance $ 125,000 Individual Life Annuity $ 645 per month for life, assuming Participant X is 67 years old on December 31, 2022 Qualified Joint Annuity and 100% $ 533 per month for Participant’s life and $ 533 for the life of the spouse after the participant’s death, assuming Participant X and her hypothetical spouse are 67 years old on December 31, 2022. According to the Department of Labor, the interim final rule “requires several explanations about estimated income payments lifetime plan administrators must provide to participants. These explanations will help participants understand, among other things, how the plan administrator calculated the estimated monthly payments and, more importantly, these estimates are illustrative only and are not guarantees. ” Additionally, the Department of Labor cites two benefits to its lifetime income illustration rule: one, it will encourage those currently contributing very little to increase their contributions to the plan, and two, it should help participants know how prepared or they are not prepared for retirement. But while it’s a good start, it’s not perfect. There are limitations that plan participants must consider. What’s more, the lifetime income illustrations might even be inferior to some of the existing tools that plan sponsors are already providing to plan participants. Read Opinion: DOL bets on SECURE Act lifetime income illustrations. So what are some of the limitations? Well, the interim rule doesn’t include future contributions, future earnings, or account performance growth. In other words, it is not necessarily a realistic projection. It is a static number. In fact, plan administrators must assume that a participant is 67 years old at the assumed start, which is the full Social Security retirement age for most workers, or the actual age of the participant, if older than 67 years. , and you retire with your current balance. “There’s not a lot of flexibility around standardized illustration,” Carrington said. And that could be problematic, especially for those still saving for retirement. By not making assumptions about future savings or the future value of an account, you could actually discourage plan participants from saving more if they see the amount of income their current balance produces as incredibly low, according to Carrington. It also means that when you change employers, the illustrations you get will reflect only the 401 (k) savings from your new employer. The proposed rule also assumes that a plan participant would immediately begin withdrawing their 401 (k) balance at age 67 using an annuity. Again, this does not reflect reality. Some people retire at 67, some sooner and some later. Some begin to withdraw their retirement accounts when they retire, while others do not. And most plan participants almost never buy an annuity to generate retirement income. What’s more, a retiree almost never has 100% of his assets in a single investment. Therefore, using a lifetime income illustration tool that uses only one annuity also does not reflect reality. “The probably optimal answer for most people is some kind of partial annuity allocation, not a 100% allocation or a 0% allocation,” Carrington said. The methodology for the calculation can be worrisome, as it can exaggerate or underestimate the future income that the individual may have and may also not account for inflation adequately, Schnaus said. And those limitations cause plan sponsors to work overtime to ensure that the sophisticated interactive lifetime income tools they already provide (or plan to provide) to plan participants are viewed as educational in nature and not as fiduciary advice. Those tools, among other things, allow a plan participant to play with savings rates, retirement dates, return on investments, and the like. Some even allow plan participants to enter accounts outside of their 401 (k) (IRA, Roth, taxable accounts, a spouse’s retirement accounts) into the plan sponsor’s retirement income illustration tool, Carrington said. “People get a much richer image,” he said. A richer value, no pun intended, is certainly what those saving for retirement deserve. But that image may have to wait for the next version of the SECURE Act, which experts like Jack Towarnicky, a researcher for the American Retirement Association and author of Discordant Disclosures, say could allow other “disclosure options” and improve what is a good start, but really just good enough.