The Sept. 18, 2021, effective date for the Department of Labor’s annual lifetime income illustrations rule is approaching. The rule’s implementation will be a paradigm shift from focusing solely on accumulation to seeing how much retirement income a participant’s balance can produce using the included assumptions. From a retirement income modeling perspective, however, the DOL-required illustrations provide a basic, static snapshot that likely will be more informative for older participants who are close to retirement than younger participants.
Sources at several of the largest 401(k) record-keepers point out that their plan-clients already exceed the DOL’s basic provisions. Keri Dogan, senior vice president for retirement income with Fidelity, says the firm goes “much farther than the DOL requirements through our digital experience and providing income projections for our participants.” Sponsors value that ability and see it as a key value provided to participants, she adds.
Michael Doshier, senior retirement strategist with T. Rowe Price, estimates that perhaps one-third or more of plans were already providing retirement income information before the SECURE Act passed. Other sponsors will continue to avoid risking either falling behind the requirements or moving too far ahead of them. “I think that most people are coming to the conclusion [that] we can appreciate what Washington did to try to make it consistent and comparable and to make sure that there is a solution in place for everybody because some kind of lifetime income disclosure is better than none,” says Doshier.
Sponsors’ reactions to the new regulation have been generally positive. Sri Reddy, senior vice president, Retirement & Income Solutions with Principal, says more plan sponsors now will begin to take an interest in learning about lifetime income options that are available in the plan or through the plan. “I think we're starting to see increased interest in income design options, income vehicles and conversations and education that plan sponsors want to provide the participants,” he notes.
Using DOL Statements to Pull in Participants
These sources agree that an important potential benefit of providing the DOL income estimates is that they can help engage participants sufficiently to use the record-keepers’ more sophisticated online modeling tools. Including multiple scenarios and complexity on a statement can overwhelm participants, Doshier points out. Because many participants receive electronic statements, it’s easier to provide the required income illustration in the statement while providing links to the record-keeper’s site to view more detailed and flexible planning options.
If participants hope to do realistic retirement income planning, they need to include the right inputs, Doshier says. Among the key factors he cites: How long you're going to contribute, how much you're going to contribute, how much do your earnings grow, how much your investments are going to grow. “I'm going to assume my returns aren't 1.8% or whatever the annuity payment table might look like at that time,” says Doshier. “Maybe I'm in a balanced portfolio, 60/40, and I'm going to expect a 4% return or a 5% return. They can start to do those things that are a little bit more tailored to them.”
Dogan also views the DOL disclosure “as a way to engage people and pull them into the digital experience where they'll see a much more personalized experience and income projection.” She cites the example of younger participants. What they will see on their statement is “not going to be a great reflection of what their actual income will look like in retirement, because that estimate won't include their future contributions or the future growth of their assets,” she explains. “So, we'll be driving them to go to that benefit on our digital experience, where they can see an estimate that does include both growth estimates and future contributions.”
Plan advisors can benefit from the increased attention on retirement income, Reddy says.
He recommends advisors expand their expertise beyond longevity and retirement income to include the notion of morbidity and how income patterns and expenses vary over time in retirement. An employee’s inability to retire due to insufficient retirement income can also disrupt hiring and promotion patterns in an organization. “This is a tool for better managing your work force,” says Reddy.