The defined contribution industry is fractured over the best way for plan executives to illustrate how accrued benefits can be converted into an estimated lifetime stream so plan participants don't outlive their savings.
Industry members are debating among themselves and with Labor Department officials over explaining lifetime income calculations without leaving themselves vulnerable to lawsuits, impairing new-product development or creating unrealistic expectations for participants.
“There's widespread support for the idea of a lifetime income illustration,” said Lew Minsky, executive director of the Defined Contribution Institutional Investment Association, Washington. “People have all sorts of views on the best way to get there.”
The internal debate includes whether such lifetime income spending illustrations should be mandated, and what legal safe harbor the DOL should offer when projecting account balances and converting current and projected account balances into lifetime income streams.
“You need some basic universal standards,” said Edmund F. Murphy III, head of defined contribution at Putnam Investments, Boston. “While you don't want to have the Wild West, you also don't want to stunt innovation and creativity.”
One point of contention is whether descriptions about lifetime income should be based on annuitization or some form of asset drawdown. Another is what formulas should be used for investment returns, inflation and other factors in participant materials.
The debate was prompted by release of a document rarely used by the Labor Department — an advance notice of proposed rulemaking, the regulatory equivalent of the DOL thinking out loud. The notice was published in the Federal Register in May, and public comment was accepted through Aug. 7. Industry observers speculate the department will issue proposed regulations early next year, which will lead to another round of public comment before final rules are enacted.
Labor Department officials are using the notice to try “to figure out ways to provide guidance quickly. It's a way to get feedback before issuing a proposed rule,” said Larry Goldbrum, Washington-based general counsel for the SPARK Institute Inc.
Still, he conceded this extra step means “we are looking at a drawn-out process.”