Why the lump sum illustration of your 401(k) account is not a particularly good indicator of how much you will have at retirement.

The Secure Act of 2020 mandates that, in the future, defined contribution benefit statements must include a lifetime income estimate that illustrates the monthly payments that plan participants could expect to receive in retirement based on their account balance. Further, this estimate must be provided at least annually and regardless of whether the plan includes annuity distribution options. Each plan sponsor (company) will use a set of assumptions to provide such an illustration. The SECURE ACT’s aim was to help workers better prepare for retirement. 

This change will not take effect until one year after the DOL has issued interim final rules, model disclosures, and specified assumptions. Vendors such as recordkeepers and TPA’s must be mindful of these types of changes and the ensuing responsibilities that come with them.

By requiring such illustrations, the Department of Labor (DOL) is taking us back to the early 1980’s. How, you ask? Simple (or so the DOL says). They want plan sponsors (that is the plan sponsors’ record keepers and TPAs) to show a plan’s participating employees what the lump sum value is in their defined contribution account and provide an estimated monthly income stream at retirement. The DOL deemed this illustration an obligation of plan sponsors in the Secure Act.

There is not a lot of room to “game the system” as regulations tell us which actuarial assumptions to use. The new, illustrative statements will show two numbers: a single life annuity and a joint and survivor annuity.

I think this is a good idea. We have participants tell us they are well off based on their account balances. They need to see what the lump sum of money really equates to based on life expectancy. The statements will also include the assumptions used.

Pensions and Investment magazine covered this and stated ; “It won’t be long before defined contribution plan sponsors governed by ERISA must provide participants with an annual lifetime income disclosure, a fact that is leading retirement community stakeholders to either count down the days with anticipation or trepidation.”

Of course, there are the naysayers; you know who you are. There are two primary camps; 

1.    By giving people actual real disclosures, they will realize they are not doing as well as they thought and only have enough money to get through a portion of their life expectancy. They will then give up and stop saving.

 And

2.    Those damn lawyers. The employers’ sponsoring plans, may have liability for their projections being interpreted as guaranteeing whatever level of income is disclosed.

Let’s address group 1.

We are in the alleged world of transparency and education, but yet, don’t want to demonstrate to the innumerate what all this really means

I will not name the pandering individual at one of our associations who says “we take issue with any mandate that makes it more difficult to operate a plan,..

Oh pleeeeeeezzze, this is one area of plan administration that purely lends itself to automation.

This group are asset gathers after all, so their message is to simply cram more money into the plan and things should work out alright. We will add modeling tools to the platform, so you can confuse yourself further, with real useless facts as to your true ability to retire. 

Encouraging people to ONLY project current balances to retirement age fails to illustrate the income value of not only the lump of money, but the value of continued saving.

Let’s go on to group 2  The participants are going to be confused by thinking they are getting a pension and then the employer will get sued. You DO know some lawyer will think this a good reason to sue.

Another quote “Further, the rule will lead to confusion among participants as to what the disclosures mean and what their given plan offers or doesn’t offer with respect to annuities”.

 The DOL is really clear about this; You, as the employer, are not liable

The DOL went so far as to say, “Plan fiduciaries that use the regulatory assumptions and the model language laid out in the rule will qualify for liability relief and will not be held responsible in the event participants are unable to purchase equivalent monthly payments”.

Down in the muck and mire!

Here’s the bottom line. The BBAGs (for those of you who forget, this stands for the Big Box Asset Gatherers) and lobby insist on making retirement planning the exclusive domain of the tech-driven, no human touch, well-positioned and mass affluent.

The ERISA Industry Committee in Washington is “disappointed” by the interim final rule and has consistently opposed the “one-size-fits-all approach that uses government assumptions to calculate annuity-equivalents,” said Aliya Robinson, senior vice president of retirement and compensation policy. ERIC believes that using online calculators and modeling tools “will better meet the goal of increasing participant understanding of the importance of lifetime income needs instead of a rigid, limited calculation based solely in the form of an annuity payment that does not include the unique circumstances of each participant,” Ms. Robinson added.

Though not everyone is opposed to this simple disclosure A spokesman for TIAA-CREF said that this type of disclosure will encourage participants to be more engaged. “More information like this leads to increased financial knowledge, more strategic long-term financial planning, and ultimately to better financial outcomes and wellness overall.”

Conclusions

It seems that attempts to simplify disclosures around the “wage in retirement” message are opposed by a lobby arguing there’s more value in promoting retirement plans as the accumulation of a lump sum.

Further, attempts to link the idea of a workplace pension, 401k plans in the States, run aground as soon as employers are frightened into thinking they may be liable for what the pension savers think they are being promised.

The alternative solutions put forward, a combination of “carry on saving” and “model, model, model”, play well to the pensions industry but are unlikely to help ordinary savers, who we know need simple messages about their retirement prospects