Workers may soon get a better sense of how much income their retirement savings really will deliver later in life.
As mandated in the 2019 Secure Act, 401(k) plan sponsors are preparing to provide illustrations on quarterly or annual statements showing an estimate of how much guaranteed lifetime income — via an annuity — a participant could potentially get out of their current nest egg.
"The general intent here is to educate plan participants about how much their actual account value would [be] in monthly income," said Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute.
"It will get participants thinking about whether they're on the right track," Berkowitz said.
Retirement security is a concern for many consumer advocates, legislators and policymakers, with research pointing to a lack of sufficient savings for Americans' post-working days. For instance, about 25% of U.S. adults have no retirement savings and just 36% think their retirement planning is on track, according to research from accounting firm PWC.
The Labor Department began moving toward implementing a lifetime-income illustration requirement in 2013, but the effort stalled and was revived as a provision in the Secure Act. The agency is soon expected to issue a final rule, as instructed in that legislation, that governs how the information is presented to 401(k) participants and what it should include.
"The congressional objective was to help participants understand whether they were saving enough to produce the income they would need in retirement," said Fred Reish, a partner with the law firm of Faegre Drinker.
Under the interim rule now in effect until mid-September, two illustrations would be provided at least once a year: one showing estimated monthly income from a single life annuity — monthly payments made until the owner dies — and the other as a joint annuity with benefits for a surviving spouse.
The monthly amounts shown would be based on a worker's current account balance and assume the payments were to start immediately — and as if the person were age 67 (or their actual age, if older).
Lifetime expectancy, used to determine how long those payments may last, would be based on a specific IRS mortality table and interest rate assumptions paid in the annuity would come from the 10-year Treasury bond's then-current yield.
The interim rule includes an example: Say someone has an account balance of $125,000, and the interest rate used is 1.83%. The illustration would show that if the participant purchased a single annuity with that amount, they'd get $645 per month for life. For a joint annuity, the person would get $533 monthly until death and then that amount would go to the surviving spouse.
Of course, if the person is, say, 35, there are lots of years left to make contributions that will grow, which the illustration wouldn't reflect. There has been some concern that for savers with lower balances, the numbers they see could be deflating if based solely on what they have accumulated so far.
"If you think about someone just starting out, and they make contributions for a year and then see they'd generate [a small amount] in monthly income, that's not a strong incentive to save," Berkowitz said. "That could be potentially troubling."
House Ways and Means Chair Richard Neal, D-Mass., sent a letter to the Labor Department last fall in response to the agency's interim rule, asking that there be additional assumptions — i.e., investment returns — included in the information provided to 401(k) participants.
It's uncertain whether the final rule will include that recommendation.
"It would be beneficial for participants to get additional examples of what future earnings and contributions could do to their [savings]," Berkowitz said.
Generally speaking, participants can expect to see the new information on their 401(k) statement between fall 2021 and fall 2022.