DOL proposal: DC benefit statements show lifetime income streams

[SumDay]

Administrators of 401(k) and other defined contribution (DC) plans might have to show current and projected account balances and related lifetime income streams on benefit statements, under a Department of Labor (DOL) advance notice of proposed rulemaking. DOL offers safe-harbor approaches for account balance projections and annuity conversions, along with a detailed example and online calculator.

Fact sheet: http://www.dol.gov/ebsa/pdf/fsanprm.pdf

Proposal from Federal Register: https://www.federalregister.gov/articles/2013/05/08/2013-10636/pension-benefit-statements <yawn>


Lifetime income calculator: http://www.dol.gov/ebsa/regs/lifetimeincomecalculator.html

 

[FUEGO]

Overall, sounds like a good idea. Getting into specific examples of how this might work and the repercussions, this could be a huge failure. Having that bottom line monthly income dollar amount on your statement makes it sound "guaranteed" or at least likely to happen. In reality, interest rate changes can drastically alter what you get. Not as big of a deal were this lifetime income stream put on the statements today in a very low interest rate environment. But imagine in the future if rates creep up to 5-8% and you start getting very high lifetime income stream values on your statement. You think you are set for life so you stop contributing or reduce contributions because hey, you won! Then life happens, interest rates drop back down to the 1-2% range now and all of a sudden your lifetime income stream drops dramatically. Angry mobs march in the street demanding of politicians "who took my retirement"?! Craziness ensues.

Edit to add: at least they are discounting the future projections to current dollars. In other words, that lifetime income stream you see is presented in real dollars (using a 3% discount rate) and not nominal dollars. Like your SS statement's projection of future income.

 

[Chuckanut]

Doesn't TIAA-CREF doe this on at least a yearly basis?

IIRC, then send a yearly letter that tells the investor about how much they can expect if they retire at 65, early and, perhaps, at 70.

 

[FUEGO]

IIRC my employer plans to do something along these lines somehow by projecting our pension and 401k and 457 balances into the future based on age, years of service, projected full retirement date, current annual contributions to 401k/457, and then generate a projected monthly income amount assuming one were to annuitize the 401k/457 balances.

 

[scrabbler1]

After my former employer froze its pension and switched to a Cash Balance plan, we would receive a statement every year telling us how much the Cash Balance plan would pay us each month if it were converted to some annuity-style payout. The same statement included similar data about the frozen pension.

 

[Independent]

Edit to add: at least they are discounting the future projections to current dollars. In other words, that lifetime income stream you see is presented in real dollars (using a 3% discount rate) and not nominal dollars. Like your SS statement's projection of future income.

The SS projections I've seen use current dollars.

 

[Independent]

I found the wording in the proposed reg complex.

So I tried the calculator. It accumulated my current balance to my retirement date at 4%. It converted the balance at retirement to a monthly income using a 6% payout rate (I input a retirement age of 65).

So it's assuming a real investment return of 4%, and annuitization that takes full advantage of mortality pooling.

 

[FUEGO]

The SS projections I've seen use current dollars.

I think we are in agreement. I was saying the calculator uses current year dollars (ie denotes forecasts in real dollar terms). Just like SS does. As in, when I turn 65 in another 30 years, I'll get $1800 per month or whatever from SS. That is 2013 dollars, not 2043 dollars. It would be more like $4400 in 2043 dollars.

In other words, the proposal at least follows good practice of accounting for inflation in the forecasts and data they will show on a statement.

 

[AndrewJackson]

Not to rehash an old subject, but this has a lot of similarities to the proposed limits on regular ira accounts. The first step to confiscation (ie treasury guaranteed annuity), is to get people thinking about retirement income in some minuscule income stream.

/Disregard this if you haven't made the jump down the rabbit hole yet.

 

[urn2bfree]

I don't know if I get these estimates as they are. Or if I,can even trust these.
My wife has a small DC account that is currently about $100,000 and the retirement services company says it could provide an AFTER TAX income of $2000 a month?! Is that if she stops working right now? NO WAY! Turns out you have to dig to find out in very small print that it is based on her continuing to contribute at her current rate and retiring at 67. Further it assumes only 2.5% inflation and 6% investment returns...but does not say if that is 6% real or above inflation. Also assumes a 25% tax rate which seems high. Also assumes buying an annuity at the time of retirement and living until 90. Oh and it ignores the effects of fees.

In other words the estimate is wildly unrealistic, if you ask me.

I would worry about how this would be mandated by law and still provide any meaningful information.

 

[Independent]

I think we are in agreement. I was saying the calculator uses current year dollars (ie denotes forecasts in real dollar terms). Just like SS does. As in, when I turn 65 in another 30 years, I'll get $1800 per month or whatever from SS. That is 2013 dollars, not 2043 dollars. It would be more like $4400 in 2043 dollars.

In other words, the proposal at least follows good practice of accounting for inflation in the forecasts and data they will show on a statement.

Thanks, I apparently read your post backwards.

 

[Independent]

I don't know if I get these estimates as they are. Or if I,can even trust these.
My wife has a small DC account that is currently about $100,000 and the retirement services company says it could provide an AFTER TAX income of $2000 a month?! Is that if she stops working right now? NO WAY! Turns out you have to dig to find out in very small print that it is based on her continuing to contribute at her current rate and retiring at 67. Further it assumes only 2.5% inflation and 6% investment returns...but does not say if that is 6% real or above inflation. Also assumes a 25% tax rate which seems high. Also assumes buying an annuity at the time of retirement and living until 90. Oh and it ignores the effects of fees.

In other words the estimate is wildly unrealistic, if you ask me.

I would worry about how this would be mandated by law and still provide any meaningful information.

I think the intent of the reg is to standardize assumptions. They appear to assume a real return of 4%, though they find a complex way to explain that.

You might want to plug her numbers into the calculator linked in the OP and see what you get.