2013
Under Section 105 of ERISA, as amended by the Pension Protection Act (PPA), defined benefit plans (traditional pensions) must provide a benefit statement every three years (with an annual notice alternative) while defined contribution plans (401k) that permit participant direction must provide the statement quarterly. However, individual account plans that do not allow participant direction must only provide the statement annually.
Accordingly, the Department of Labor is considering the following requirements in benefit statements:
1. A lifetime income illustration converting the participant’s current balance as if the participant (or beneficiary) had reached normal retirement age under the plan, even if he or she is much younger;
2. Another lifetime income illustration using a projected balance to normal retirement age, based on assumed future contribution amounts and investment returns;
3. Both income streams would be (1) presented as estimated monthly payments based on expected mortality, and (2) if the participant is married, include a projection based on the joint lives of the participant (or beneficiary) and spouse (based on a 50% survivor annuity); and
4. An “understandable explanation of the assumptions” behind the illustrations and a statement that projections and lifetime income stream illustrations are estimates and not guarantees.
The move toward providing this information is important because the most difficult task Americans with defined contribution plans have is determining their realistic income stream during a long retirement. The most secure way to do that is through an annuity. However, there is understandable reluctance to turn over ones life savings to an insurance company. That means the task falls on the individual who may have no idea of the potential income possibilities from an account balance.
For example, a male age 65 with $1,000,000 to invest may expect an annuity with no inflation adjustment and no survivor benefit of about $5544.00 per month. Providing a 100% survivor annuity to a spouse the same age provides a monthly income of $4527.
If this type of information is provided regularly to workers it may serve to improve retirement planning and expectations and hopefully encourage higher saving rates.
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