The End in Mind
Could lifetime income disclosures undermine retirement savings?
Over the past several years, a growing amount of attention has been focused on the decumulations of defined contribution plan balances in retirement – and a sense that the emphasis on account growth, and account balances, glosses over the reality that at some point in the future those savings will need to be turned into a retirement paycheck.
Enter the SECURE Act, which among its numerous retirement-related provisions added the new “lifetime income disclosure” requirements to ERISA’s benefit statement rules. It applies to individual account plan benefit statements and the lifetime income disclosure must be provided in one benefit statement during each 12-month period. Simply stated, the new law requires that the participant’s total accrued benefit be expressed as a “lifetime income stream” in the form of a single life annuity and a qualified joint and survivor annuity, assuming the participant has a spouse of equal age. The assumptions for these disclosures will be provided later by the DOL.
While it’s generally assumed (certainly that was what the authors of SECURE hoped) that this presentation will help participants attain a more realistic perspective on their retirement future (or at least the sufficiency of the financial resources they have amassed for that eventuality), there has been some concern that the reality, certainly in the absence of counsel on how to improve those prospects, will discourage, rather than motivate saving. Indeed, that was a concern expressed at a gathering of ERISA attorneys here in the nation’s capital.
That puzzled me a bit – I’ve currently got my accumulated 401(k) savings spread across the plans of four different providers, and three of them have been projecting my retirement income for several years now. Now, because those balances are in different places, those projections haven’t been especially useful (though I know how to add), but still… providing those type projections may still be on the horizon for some, but it’s hardly a big leap. And I’ve not heard or read about any big slumps in savings rates as a consequence.
Though it’s likely drifted from the recollection of most, back in May 2013, the DOL’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance (sound familiar?). The question then, as now, was – what impact, if any, would that disclosure have on participant behaviors?
Well, the Employee Benefit Research Institute (EBRI) included a series of questions in the 2014 Retirement Confidence Survey that would provide monthly income illustrations similar in many respects to those proposed to be provided by the EBSA’s online Lifetime Income Calculator proposal, and ask workers for their reaction(s).
What impact did that have?
Now, while there are certainly going to be differences resulting from a personal engagement (and there were some differences in the assumptions,[i]) EBRI asked about their current account balances, and assuming retirement at 65, presented them with a monthly income figure. As it turned out, more than half (58%) felt that the illustrated monthly income was in line with their expectations.[ii] Considering those results, it is perhaps not surprising that the vast majority (81%) of the respondents indicated that they would continue to contribute what they do now after hearing the projected monthly income amount, while 17% replied that hearing this information would lead them to increase the amount they are contributing.
It remains to be seen what difference(s), if any, guidance from the DOL following the SECURE Act’s admonitions might have on the projections some (most?) recordkeepers are already providing, and how individuals, once presented with those projections actually respond.
That said, the evidence we do have – the EBRI study and the anecdotal sense from the examples already in the marketplace – suggests that that “end in mind” focus will, at worst, have no impact – and at best, might well be the positive influence its proponents have hoped.
- Nevin E. Adams, JD
Over the past several years, a growing amount of attention has been focused on the decumulations of defined contribution plan balances in retirement – and a sense that the emphasis on account growth, and account balances, glosses over the reality that at some point in the future those savings will need to be turned into a retirement paycheck.
Enter the SECURE Act, which among its numerous retirement-related provisions added the new “lifetime income disclosure” requirements to ERISA’s benefit statement rules. It applies to individual account plan benefit statements and the lifetime income disclosure must be provided in one benefit statement during each 12-month period. Simply stated, the new law requires that the participant’s total accrued benefit be expressed as a “lifetime income stream” in the form of a single life annuity and a qualified joint and survivor annuity, assuming the participant has a spouse of equal age. The assumptions for these disclosures will be provided later by the DOL.
While it’s generally assumed (certainly that was what the authors of SECURE hoped) that this presentation will help participants attain a more realistic perspective on their retirement future (or at least the sufficiency of the financial resources they have amassed for that eventuality), there has been some concern that the reality, certainly in the absence of counsel on how to improve those prospects, will discourage, rather than motivate saving. Indeed, that was a concern expressed at a gathering of ERISA attorneys here in the nation’s capital.
That puzzled me a bit – I’ve currently got my accumulated 401(k) savings spread across the plans of four different providers, and three of them have been projecting my retirement income for several years now. Now, because those balances are in different places, those projections haven’t been especially useful (though I know how to add), but still… providing those type projections may still be on the horizon for some, but it’s hardly a big leap. And I’ve not heard or read about any big slumps in savings rates as a consequence.
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Though it’s likely drifted from the recollection of most, back in May 2013, the DOL’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance (sound familiar?). The question then, as now, was – what impact, if any, would that disclosure have on participant behaviors?
Well, the Employee Benefit Research Institute (EBRI) included a series of questions in the 2014 Retirement Confidence Survey that would provide monthly income illustrations similar in many respects to those proposed to be provided by the EBSA’s online Lifetime Income Calculator proposal, and ask workers for their reaction(s).
What impact did that have?
Now, while there are certainly going to be differences resulting from a personal engagement (and there were some differences in the assumptions,[i]) EBRI asked about their current account balances, and assuming retirement at 65, presented them with a monthly income figure. As it turned out, more than half (58%) felt that the illustrated monthly income was in line with their expectations.[ii] Considering those results, it is perhaps not surprising that the vast majority (81%) of the respondents indicated that they would continue to contribute what they do now after hearing the projected monthly income amount, while 17% replied that hearing this information would lead them to increase the amount they are contributing.
It remains to be seen what difference(s), if any, guidance from the DOL following the SECURE Act’s admonitions might have on the projections some (most?) recordkeepers are already providing, and how individuals, once presented with those projections actually respond.
That said, the evidence we do have – the EBRI study and the anecdotal sense from the examples already in the marketplace – suggests that that “end in mind” focus will, at worst, have no impact – and at best, might well be the positive influence its proponents have hoped.
- Nevin E. Adams, JD
[i]Of
course, any such projection is necessarily required to make a number of
critical assumptions – including future contribution activity, future
rates of return, future asset allocation, and future annuity purchase
prices. Other changes in assumptions were:
- Rather than using normal retirement age for the calculation, they asked about their expected retirement age.
- Since the age of the spouse was not known for married respondents, only the single life annuity income illustration was used.
- Given that the information was being provided to the respondent during a phone interview, only the projected monthly income (based on the projected account balance given the respondents’ reporting of their current balances) was provided.
[ii]On
the other hand, 8% of the defined contribution participants said the
monthly amount was much less than expected, though another 19% said it
was somewhat less than expected.
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