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.
The Department of Labor on Aug. 18 unveiled an interim final rule outlining how plan sponsors would convert participants' account balances into an estimated monthly income stream at retirement. The move comes after the Setting Every Community up for Retirement Enhancement Act, a comprehensive retirement security package known as the SECURE Act that Congress passed in December, required the DOL to promulgate the regulation and issue a final rule.
Using assumptions set forth in the rule, plan administrators will show participants equivalents of their retirement savings as monthly income under two potential scenarios — first, as a single life annuity; and second, as a qualified joint and survivor annuity that factors in a survivor benefit, the Labor Department noted in a fact sheet.
Under the interim final rule, retirement plans would provide lifetime income forecast illustrations using prescribed assumptions — based on information like a participant's martial status and assumed age at the start of the annuity — designed to give savers a "realistic illustration of how much monthly retirement income they could expect to purchase with their account balance," the Labor Department said.
Moreover, retirement plans will provide explanations about the lifetime income forecasts — based on a participant's current account balance — and the assumptions used to calculate the forecasts, the interim final rule states.
J. Mark Iwry, non-resident senior fellow at the Brookings Institution in Washington and former senior adviser to the secretary of the Treasury and Treasury's deputy assistant secretary for retirement and health policy in the Obama administration, said the Labor Department interim final rule takes a "thoughtful and reasoned" approach to the issues, though it could be improved by expanding protection from liability for plan sponsors, including doing more to protect those currently providing forecasts using other assumptions.
In particular, Mr. Iwry is concerned that some younger participants with smaller current account balances might be discouraged from saving when they see how small their projected monthly income could appear to be. Those participants could be hit with "sticker shock; not that the price strikes them as so high but that the monthly benefit strikes them as so low," Mr. Iwry said.
Members of the SPARK Institute, which includes record keepers — the group that will be tasked with making the lifetime income calculations — have expressed similar concerns, said Tim Rouse, the Simsbury, Conn.-based group's executive director. SPARK members think record keepers should actively encourage participants to use modeling tools to develop a more robust and detailed forecast that could accommodate estimates of future earnings, Mr. Rouse added.
The interim final rule doesn't take into account future contributions or higher salary earnings, which isn't "necessarily a bad thing, but our members don't want the new lifetime income disclosure to demotivate small account balance savers; that is why they want to emphasize using more in-depth planning tools," Mr. Rouse said.
To mitigate the problem, Mr. Iwry would like the final rule to "also encourage plans to either illustratively project current balances to retirement age or encourage participants to use Labor's calculator to do their own projections," to illustrate the income value of continued saving.