Wouldn’t it be nice to have an idea of how much income your retirement savings could deliver when you retire? Well, legislators are looking to make this information available right at your fingertips through The Lifetime Income Disclosure Act.
Details of proposed legislation:
The intent of the bill is to help participants of defined contribution plans understand how their current account balance translates to monthly lifetime income at retirement. In other words, participants would receive a snapshot into their financial future in just one glance.
Plan sponsors of defined contributions plans (subject to the Employee Retirement Income Security Act (ERISA)) would be required to illustrate how a participant’s account balance would translate into guaranteed monthly payments at retirement. The monthly income estimates take into account the participant’s current accrued value of benefits, with no future earnings or contributions assumed in the income calculation.
The legislation directs the Department of Labor (DOL) to issue tables and a model disclosure to assist employers in calculating an annuity equivalent for illustration on employee benefit statements. This calculation is required to be done at least annually and plan sponsors using DOL’s model would have safe harbor protections.
Sounds great, right? But is an income illustration based only on current account balance truly useful in determining a participant’s future retirement readiness? Defined contribution account balances can, at the very least, continue to accrue earnings and continue to grow with future contributions. In this regard, is a projection of both account balance and monthly income a more useful illustration for retirement income planning purposes?
For example, The Principal already provides an “Are You On Track?” illustration on participant statements, including a projected monthly income estimate at retirement age compared to a monthly income goal amount. This gives participants a simple, useful tool to determine if they may need to increase retirement savings now to reach their goal.
In addition, what is the actual process surrounding calculating these payments? Employers and providers utilizing the tools implemented by the DOL would be sheltered from liability. But could this prevent plan fiduciaries from using potentially more meaningful income illustrations if available? And could this lead to less innovation around retirement readiness education efforts by service providers?
Perhaps, the result of this initiative may be beneficial solely in theory and not in practice.
Your call to action:
The bill has been referred to committees within both the House and the Senate and is currently under discussion. In the meantime, the Department of Labor wants to hear your perspective. Financial professionals, plan sponsors, participants: all are welcome. Whether you take the opportunity to advocate for a valuable change or oppose an unnecessary mandate, one thing is for sure; your opinion will be heard. Voice it!
Comments must be received no later than August 7th, 2013 and may be submitted to the following:
• Federal eRulemaking Portal: Follow the instructions for the submissions of comments.
• Email: 3-ORI@dol.gov. Include RIN1210-AB20 in the subject line of the message.
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Insurance products and plan administrative services are provided by Principal Life Insurance Company. Securities are offered through Princor Financial Services Corporation, 1-800-547-7754, Member SIPC and/or independent broker dealers. Securities sold by a Princor® Registered Representative are offered through Princor. Princor and Principal Life are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.
© 2013 Principal Financial Services, Inc. | t13062801lr