Current Thinking

The Lifetime Income Disclosure Rule: A Good Idea That Could Finally Become a Reality

Figuring out how much money one needs to save for retirement can be quite a balancing act for even the most prudent plan participant. Estimating when you will even retire can in itself be a conundrum for employees, especially younger employees; hazarding a guess at what inflation, the stock market, and other economic indicators might be 10, 15, 20 years (or more) from now can make one’s head spin.

But an important aid could be coming from the U.S. Department of Labor (DOL), which on August, 18 2020 issued an Interim Final Rule on lifetime income disclosures under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE) Act.

The Interim Final Rule outlines how defined contribution plan sponsors governed by The Employee Retirement Income Security Act of 1974 (ERISA) would provide participants with an annual lifetime income disclosure, which is designed to illustrate how the participant’s account balance can be converted into an income stream at retirement.

Included in the lifetime income disclosure statement are: The account balance; date of starting payments; age at which the annuity starts; interest rate; and an estimated end date for the payments. Importantly, because only the first piece of information (account balance) is known at the point of producing the statement, the rule details how the other assumptions should be calculated. 

“Our goal is to help workers and retirees understand how savings translate to retirement income,” said Jeanne Klinefelter Wilson, Acting Assistant Secretary of Labor for the Employee Benefits Security Administration. “Defined contribution plan savings are meant to stretch across the years of retirement. When workers are reminded of what their balances could mean in terms of an estimated monthly dollar amount, they can use this information to plan both savings and spending.”

We approve of this concept – which, in fact, is not a new one. In 2016, the U.S. Government Accountability Office (GAO) conducted a survey of 11 401(k) plan recordkeepers to determine whether those plans had adequately “adopted products and services that could help participants turn their savings into a retirement income stream.”

The (not-so-surprising) answer: They had not. In fact, the GAO found that of the plans covered by its research, about two-thirds did not offer a withdrawal option and about three-quarters did not offer an annuity option.

“Concerns about legal risks and record keeper constraints may deter many plan sponsors — typically employers that provide 401(k) plans and establish investment and distribution options — from offering lifetime income options,” GAO noted. “Without clearer criteria [from DOL] to select an annuity provider, fear of liability may deter plan sponsors from offering annuities.”

The GAO further found that a menu of lifetime income options was not usually available: “DOL provides an incentive in the form of limited liability relief to plan sponsors who, among other things, provide participants at least three diversified investment options. However, no such incentive exists for plan sponsors offering a mix of lifetime income options.”

At that time, the GAO made seven recommendations to the DOL, including that it clarify the criteria to be used by plan sponsors to select an annuity provider; consider offering an appropriate mix of lifetime income options; and consider providing Required Minimum Distributions (RMD)-based default lifetime income to retirees.

RMD-based options are of course valuable tools as well, but we feel that the annual lifetime income disclosure statements could be of greater and more immediate value to plan participants. Some service providers, including Pentegra, provide lifetime income estimates for 8-10 years. That way participants can better understand how far the money they are saving is expected to last when they retire.

We use our own metrics and assumptions in calculating those figures, which are not far off from what DOL is proposing.

The Interim Final Rule is expected to be published “very soon” in the Federal Register, followed by a 60-day comment period. Should the DOL follow through, it will finally address a longstanding issue; remember, the GAO’s survey took place over four years ago.

Of course, the federal government can move in mysterious ways. But here’s hoping that annual lifetime income disclosures become an industry-wide norm sooner than later.

About the Author

Richard Rausser

Richard W. Rausser has over 25 years of experience in the retirement benefits industry. He is Senior Vice President of Client Services at Pentegra Retirement Services, a leading provider of retirement plan, fiduciary outsourcing and institutional investment services to organizations nationwide. Rausser oversees the consulting, marketing and communications, non-qualified plan and BOLI business development and  actuarial service practice groups at Pentegra. He is a frequent speaker on retirement benefit topics; a Certified Pension Consultant (CPC); a Qualified Pension Administrator (QPA); a Qualified 401(k) Administrator (QKA); and a member of the American Society of Pension Professionals and Actuaries (ASPPA). He holds an M.B.A. in Finance from Fairleigh Dickinson University and a B.A. in Economics and Business Administration from Ursinus College.