Benefits and Compensation

EBSA’s Lifetime Income Illustration: Some Question DOL Formula

The day after the U.S. Department of Labor’s Employee Benefits Security Administration issued a proposal outlining rules it is considering for lifetime income illustrations in pension benefit statements, retirement industry professionals applauded DOL’s effort but expressed concern about how realistic the proposal’s formulas are.

In the recently released advance notice of proposed rulemaking, EBSA is proposing that a participant’s accrued benefits:

  1. be expressed on his or her pension benefit statement as both a current account balance and an estimated lifetime stream of payments; and
  2. be projected to his or her retirement date and then converted to and stated as an estimated lifetime stream of payments.

Attendees and panel speakers at Employee Benefit Research Institute’s Policy Forum on May 9 in Washington, D.C., said DOL was taking a step in the right direction by drawing up guidelines for ways plan sponsors can show participants how their current and future retirement savings will shape their future income stream. But among the questions the organization’s leader posed was whether the proposal’s longevity projections were too short.

Some Assumptions Questioned

EBRI CEO and President Dallas Salisbury told the gathering that “people with very long lives may run out of money” using the new document’s assumptions unless they purchase an annuity to supplement their retirement savings. (In converting account balances into lifetime income streams, the factors the proposed calculator uses include a unisex mortality rate from Code Section 417(e).) Salisbury also was critical of the fact that the proposal seems to assume purchase of a lifetime annuity, which isn’t yet common for most plan participants and retirees in the United States.

Another EBRI staff member, Research Director Jack VanDerhei, pointed out that the modest proposed participant contribution rate increase of 3 percent a year supplied in the ANPRM could prove to be an example of the “undesirable freezing effect” that regulation can have if it leads most participants to limit their savings to that amount. However, he said it was likely DOL chose that contribution level to encourage saving by workers with lower incomes and retirement balances who use the proposed lifetime income calculator. Modeling a higher average contribution would be “so demoralizing” for those who couldn’t match such a goal, he suggested.

Other presenters at the forum advocated plan sponsors recommending employee contribution rates of 10 percent to 15 percent of annual income.

Finding out More

To read the complete story on Thompson’s HR Compliance Expert, click here.

More information on retirement plan administration can be found in The 401(k) Plan Handbook.