NAPA Net » House, Senate Bills Would Require Lifetime Income Disclosures

“On its surface this requirement seems like a good idea and for the most part it is.  Nothing is more important than knowing what your retirement savings can produce as a stream of income. The problem is that it creates yet another administrative burden on plan sponsors.  However, the larger concern is the assumptions that may be prescribed by government.

The value of such a statement depends on those assumptions and if they are unrealistic for a given situation they will produce very misleading information. A better approach is to provide basic assumptions, but to allow the participant to modify them such as changing the assumed interest rate or life expectancy assumption. In addition, any annuity projection requirement should include a joint and survivor option.

Anyone can get a good idea of what their account balance will produce as an annuity in the commercial market by using one of many online annuity calculators. For example,

Such a site tells me that with $500,000 I could buy an immediate annuity at age 65 producing $2,750 per month for life (there will be some variation among insurers).

I could have sworn there was more here not oo long ago
I could have sworn there was more here not oo long ago

“Legislation introduced recently in both the U.S. House of Representatives and the Senate would require retirement plans to include an “annuity equivalent” on participant statements.

In the House, Reps. Luke Messer (R-Ind.) and Mark Pocan (D-Wisc.) introduced the Lifetime Income Disclosure Act (H.R. 2317), which would require that on each participant statement, the individual’s current retirement balance must be illustrated as if they were receiving a monthly paycheck for life (based on assumptions specified in rules prescribed by the Secretary of Labor).

Sens. Johnny Isakson (R-Ga.) and Chris Murphy (D-Conn.) introduced a companion bill, the Lifetime Income Disclosure Act (S. 1317) in the Senate. Isakson previously introduced the legislation in the 111th and 112th Congresses.

Original cosponsors of the Lifetime Income Disclosure Act in the House include Reps. Jared Polis (D-Col.), Dave Reichert (R-Wash.) and Ron Kind (D-Wisc.)

The American Retirement Association supported the legislation, along with American Council of Life Insurers, Insured Retirement Institute, MassMutual, Pension Rights Center, Prudential, TIAA-CREF and Women’s Institute for a Secure Retirement.”

via NAPA Net » House, Senate Bills Would Require Lifetime Income Disclosures.

One comment

  1. I have no qualms about having the Department of Labor or the Internal Revenue Service put a website up – with all their great expertise – where participants can go and obtain a projection. So long as the government shoulders the blame for mistakes in estimates.

    The problem is that any projection requires so many assumptions as to be an excercise in stupidity.

    Take a 30 year old:

    First, you are going to project the lifetime income commencing at age 65 for the current account balance, and, tell me, what will interest rates be tomorrow, what will they be in 35 years when this individual goes to convert to a life annuity, which insurance companies will be in the annuity business, what will the loads be, what will longevity look like, are we to use unisex factors, or sex distinct factors – and perhaps most importantly, what assumptions are we to make about rates of return on the existing account balance, each and every one of the next 35 years. Frankly, the only good quote would be one based on current purchase rates, as if the individual took their account balance today and bought a deferred annuity today.

    Second, this same 30 year old will likely have 5, 6, 7, 8, 9 or more employers from now to age 65. A percentage of those workers will have employment with employers who do offer retirement plans, and others who may not offer retirement plans. Will they have the same income, will their incomes regularly increase, etc. Then, take all the problems and assumptions in step one and you have the same challenges, writ large.

    Third, who’s to say what a monthly income of $1,000 a week, what it will buy in 35 years.

    Fourth, what about those who become disabled prior to age 65, how about those who die and leave survivors – spouse’s, children, etc.

    Fifth, and finally, ostensibly the goal is to show individuals just what their account balance might buy at age 65 which, in turn, will prompt people to save more. If that is the goal, we know that such projections don’t work/they are not adequate. We do know what works – automatic enrollment, automatic escalation, automatic reallocation.

    This is a waste of billions of dollars of plan assets to produce a projection that no one asked for, few will read, even fewer will understand, even fewer will use to trigger action, and for those in the small minority who do take action, it is probably just as likely to trigger mistakes in savings/investment actions as it is to trigger the right response. That is, when individuals see just what little their past saving efforts create, they are likely to conclude that preparation for retirement is an exercise in futility… and may be more likely to stop saving, than to increase their savings rate.

    Finally, look at the study the DOL itself cites in terms of the effectiveness of this type of disclosure of lifetime income (there is a pending regulatory requirement to issue such a projection). That study by behavioral economists states, in part: “we find that providing income projections along with general plan information and materials assisting people through the steps of changing contribution rates resulted in 29 percent higher probability of a change in contributions relative to a control group… In addition, individuals sent this treatment increased their annual contributions by $85 more than the control group …”

    Turns out that they surveyed folks at the University of Minnesota where the avg contribution rate before intervention was 3.19 percent, and 3.33 percent after intervention. Average contribution went from $2,324 to $2,450 a year … Average tenure was 12.3 years , average age 45 and average income almost $60,000.

    The percentage in the sample that changed their contributions was 4.09 percent in the control group (who didn’t get.the special intervention, attention and new tools) versus 5.3 percent in the test group (5.3 percent is 29 percent higher than 4.09 percent).

    So, the study relied upon by the DOL is for a population much older than the target of the legislation/regulation, a population that is paid much more, and a population with a much higher profile intervention than a projection likely to be printed on page three or four, or even later on the 401(k) account statement. Even with all those advantages, all the researchers could achieve was a 1.21% increase in response rates compared to the control group, with.all of $85 per year in added savings.

    In other words, almost 95 percent of the study group did not respond to the intervention, just 1 percent more than the response rate among the control group that received no intervention.

    I would not call that type of a disclosure effective – nor worth the hundreds of millions, perhaps billions of dollars in cost from the disclosures themselves, plus the potential costs of litigation.

    And, oh yes, when I was in a plan sponsor role, more than 10 years ago, we were sued over just such a projection of lifetime income.


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