Workers could soon get a better sense of how much income their retirement savings will actually deliver later in life.
As mandated by the Secure Act 2019, the sponsors of the 401 (k) plan are preparing to provide illustrations on quarterly or annual financial statements that show an estimate of how much guaranteed lifelong income – through an annuity – a participant may be out of their current one Could get a nest egg.
“The general intent here is to educate plan participants what their actual account value would be [be] monthly income, “said Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute.
“Participants will think about whether they are on the right track,” said Berkowitz.
Retirement planning is a concern of many consumer advocates, lawmakers, and policy makers, with research suggesting a lack of adequate savings for Americans’ days after work. According to a study by the accounting firm PWC, around 25% of adults in the US have no retirement plans and only 36% think their retirement planning is on the right track.
The Department of Labor began introducing a lifetime income statement requirement in 2013, but efforts stalled and revived as a provision in the Secure Act. The Agency is expected to issue a final ruling shortly, as required by this Act, that will govern how the information is presented to 401 (k) participants and what it should contain.
“The goal of the convention was to help attendees understand whether they were saving enough to get the income they need in retirement,” said Fred Reish, partner at Faegre Drinker law firm.
According to the transitional arrangement that now runs until mid-September, two images would be provided at least once a year: one with the estimated monthly income from a single annuity – monthly payments until the death of the owner – and the other as a joint pension with benefits for a surviving spouse.
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The monthly amounts displayed would be based on an employee’s current account balance and assume that payments would begin immediately – and as if the person were 67 years old (or their actual age, if older).
Life expectancy, which is used to determine how long these payments can take, would be based on a specific IRS mortality table, and the interest rate assumptions paid in the annuity would come from the then current yield on the 10-year government bond.
The transition rule gives an example: suppose someone has an account balance of $ 125,000 and the interest rate used is 1.83%. The figure would show that if the subscriber bought a single annuity with this amount, they would receive $ 645 per month for life. For a joint pension, the individual would receive $ 533 a month until death, and then that amount would go to the surviving spouse.
Of course, if the person is 35 years old, for example, there will be many years left to make contributions that will grow, which the figure would not reflect. There have been some concerns that for savers with lower balances, the numbers they see could deflate if only based on what they’ve accumulated so far.
“When you think of someone who is just starting out, contributing for a year, and then you see that they are generating something [a small amount] With monthly income, that’s not a big incentive to save, “said Berkowitz.” That could be potentially worrying. “
House Ways and Means Chairman Richard Neal, D-Mass., Sent a letter to the Department of Labor last fall in response to the agency’s tentative ruling, requesting that additional assumptions – i.e., ROI – be included in the information provided to 401 become (k) participants.
It is uncertain whether the final rule will include this recommendation.
“It would be beneficial for participants to receive additional examples of what future revenues and contributions are with their [savings]”Said Berkowitz.
In general, attendees can expect to see the new information on their 401 (k) statement between Fall 2021 and Fall 2022.