DOL: Will Your 401(k) Last You For Life?

Say you have a $150,000 401(k) retirement savings account balance—that’s the average account balance for participants age 55 and older in the 20,000-plus plans Fidelity Investments administers. What does that mean in terms of how much you can expect to take out each year when you’re retired?

Pick a retirement income calculator, change the assumptions, and you’ll get different numbers. That’s why the Department of Labor is struggling with its idea of a proposed rule requiring employers to provide “lifetime income illustrations” on 401(k) and 403(b) account statements. The idea is that showing employees their retirement plan account balance as level monthly payments for their lifetime—not just a balance--will help them see if they are on track for a comfortable retirement.

It’s been a hot topic since the DOL and the Department of Treasury issued a request for information on what should be included in these benefit statements in 2010; 700 comments came in, and hearings were held. This May the DOL published an advanced notice of proposed rulemaking on lifetime income illustrations, asking again for comments from the public, and the DOL has extended the deadline for submitting comments from July 8 until Aug. 7--in case you want to chime in.

A group of 10 big stakeholders including the American Bankers Association, The Investment Company Institute and the Profit Sharing Council of America, requested the extension, citing the 27 “technical and complex” questions in the notice and “differences in approaches and philosophies [member companies] have about projecting retirement income and presenting the information to participants.” The group letter to the DOL states: “Financial professionals who are knowledgeable about these matters can reasonably disagree about them.”

Comments already coming in make that clear. The Depository Trust & Clearing Corp., which has a 401(k) plan for its employees, says in its comments here that a modeling tool that allows employees to input their own assumptions is preferable to providing lifetime income projections based on a single set of assumptions on statements. By contrast, the American Council of Life Insurers in its comments here says it is in favor of including lifetime income illustrations on benefit statements.

Is there any hope for employees if the experts find it so difficult? “Getting people to think about their 401(k) account as a retirement income generating vehicle can motivate them to save more and think twice about taking money out before retirement to pay for other things, says Lori Lucas, a retirement plan expert at Callan Associates. “The key pushback from employers is that the projection is almost guaranteed to be inaccurate,”she says. “The projection is only as good as the assumptions.” That’s why the DOL is asking for more guidance.

In the meantime, the DOL created a lifetime income calculator using assumptions described in the notice. Or you can give these calculators a try: the AARP Retirement Calculator, the Fidelity Income Strategy Evaluator or the Economic Security Planner.

The DOL notice says how to send in comments on page two, or you can weigh in on the Lifetime Income Disclosure Act (H.R. 2171) introduced by Rep. Rush Holt (D-N.J.) and S. 1145 introduced by Sen. John “Johnny” Isakson (R.-Ga.). Sen. Elizabeth Warren (D.-Ma.) who helped create the Consumer Financial Protection Bureau is one of the co-sponsors.

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