Remember 2019? Way back then, the SECURE Act mandated retirement plans to provide lifetime income projections to help participants understand their savings. What’s expected now? How is the retirement industry gearing up—and how’s it going?
Understanding the DOL Mandate
The Department of Labor (DOL) has mandated that lifetime income estimates must be introduced to participants this year and provided specific guidance for doing so. Plan Sponsor provides this refresh—be sure to make note of the timing:
In 2019’s Setting Every Community Up for Retirement Enhancement—or SECURE—Act, Congress stipulated that DC plans should provide retirement plan participants with projections illustrating monthly retirement income amounts generated from their accumulated retirement savings. The Department of Labor’s interim final rule, published this past September, requires that participants’ projected income be illustrated as an account balance conversion to a lifetime income annuity.
The law provides that participant-directed plans, which are required to furnish quarterly benefit statements to participants, must include the illustrations on only one benefit statement in any 12-month period. So plans that issue quarterly statements must first comply by using a benefit statement for a quarter ending within 12 months of the September 18, 2021, effective date.
Accordingly, around the country, plan sponsors are engaged with their service providers, gearing up for the introduction of the lifetime income estimates to participants. Many plans are even adding new tools and programs to help participants understand and act on the illustrations with new commitments to save.
Duties and Protection Too
With new mandates coming into effect, it’s especially important for plan sponsors to be mindful of our fiduciary obligations. Plan Sponsor, for example, reminds us that according to the DOL, plan sponsors are responsible for: “Understanding your plan and your responsibilities; carefully selecting and monitoring service providers; making contributions on time; providing appropriate disclosures to plan participants and filing annual reports to the government on time; and avoiding prohibited transactions.”
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Wake Up Call?
Confused and dismayed. That’s how retirement industry experts anticipate plan participants will react when they receive their first lifetime income projects. There’s likely to be a steep learning curve involved in digesting the information—and comparing it to their previous understanding. Reporting on some of the related research, Plan Sponsor shares these insights about participant reactions:
For younger participants who have yet to accumulate large balances, the projections could be a wake-up call, as PGIM’s research showed that, overall, 68% of participants’ reactions were negative. The survey also asked respondents if they will be likely to act regarding their retirement plans after seeing the numbers, and 70% said yes…
Older participants and near-retirees receiving the projected disclosures are apt to see income amounts that are higher than their actual incomes will be. That is because the mandated DOL calculation method assumes that the participant’s full balance has been annuitized.“The reason it is less is that financial experts suggest withdrawing only 4% of your initial retirement balance annually if you wish to retain access to your assets and have a good chance of not running out of money in retirement,” PGIM research states. “The amount communicated in your statements was based on annuitizing your full account balance.”
Anticipating Confusion
Because the information plan participants have customarily relied on includes future contributions, they are indeed likely to be baffled—and concerned—when they begin receiving the new illustrations. As Amy Reynolds, of Mercer sums up for Plan Sponsor: “The challenge with the methodology that’s going to be used is that it really reflects assumptions that will underplay what most people’s retirement income will likely be, because the projection doesn’t consider the future contributions someone might make, or the person’s future earnings. Therefore, it won’t look sufficient from the perspective of most participants…”
One way many service providers are gearing up for release of the lifetime illustrations is by preparing supplemental information to share with plan participants. This can include projections based on future contributions, earnings and investment returns. Participants can then be assisted to understand both the differences and relationships between the DOL projections and the supplemental information.
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