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The Lifetime Income Disclosure Act: A simple idea that isn’t so simple

The Lifetime Income Disclosure Act, sponsored in Congress by two senators and two representatives, seems like such a good, simple idea — but it's not so simple.

The bill would require quarterly benefit statements furnished to plan participants to include, at least once a year, a statement of the lifetime income stream the accrued assets would provide.

Such a statement would indicate to participants whether they were on track to have enough in their retirement accounts to live comfortably. If not on track, which many are likely to be, it might inspire them to put more into their retirement accounts.

The problem is the bill is barely an outline of the idea. It leaves the hard work to bureaucrats in the Department of Labor. The bill directs the secretary of labor to “issue a model lifetime income disclosure, written in a manner which can be understood by the average participant: and prescribe the assumptions that plan administrators may use in converting total accrued benefits into lifetime income stream equivalents.”

And there is the rub: the assumptions. What assumptions should plan sponsors, or their record keepers and trustees, or the annuity providers, make for the life expectancies of the beneficiaries? As recent research has shown, life expectancies differ among the different socioeconomic classes. While it is still increasing for college-educated men and women and non-college black and Hispanics, it is declining for non-college-educated white males.

What interest rate should they assume will prevail when the beneficiaries retire? This assumption will affect the prices of annuities and the benefits such annuities will pay. Alternatively, it will affect how much the beneficiaries can take from their assets each year if those assets are rolled over into a self-directed individual retirement account.

No matter what assumptions the Labor Department directs the plan sponsors to use for the lifetime income projection, the assumptions will be wrong for many employees.

One thing the bill did get right was its declaration that “no plan fiduciary, plan sponsor or other person shall have any liability under ERISA solely by reason of the provision of lifetime income stream equivalents derived in accordance with such assumptions and related rules.”

But despite this declaration, if the bill becomes law, sponsors and other fiduciaries are likely to find themselves defending the projections in their income statements until the courts dismiss a few such legal challenges.

This article originally appeared in the April 17, 2017 print issue as, "Simple idea really isn't that simple".