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Debate: Are Lifetime Income Illustrations Helpful?

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The Department of Labor has issued guidance on implementing the final rule of the Secure Act lifetime income illustration provisions.

Under the Secure Act, plan sponsors must disclose a participant’s account balance as both a single life annuity and joint and survivor annuity income stream. Plans must furnish lifetime income illustrations annually (or more frequently). The illustrations can be incorporated into any quarterly statement up to the second calendar quarter of 2022. 

Plans are not required to incorporate information about the account’s earnings over the years, but plans are permitted to provide additional lifetime income illustrations as long as the required illustrations are also provided. 

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the effectiveness of the new post-Secure Act lifetime income illustrations.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: These new lifetime income illustrations go a long way to help retirement savers understand the benefits of annuitization and generating a stream of guaranteed lifetime income for the future. It’s not an exact science, and we need to make sure that the rules are manageable enough for plan sponsors to comply without undue hardship and unworkable administrative burden. 

Bloink: Under the current rules, the new lifetime income illustrations must show the lifetime income amount if the taxpayer’s retirement account was converted into a single life annuity and if it was converted into a joint and survivor annuity.

As the law stands, those illustrations are calculated as though the income would begin immediately, so that potential earnings growth is excluded. In other words, the client’s age isn’t fully factored into the equation — meaning that younger taxpayers could see numbers that actually discourage them from saving within the 401(k) vehicle.

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Byrnes: The rules as they stand may exclude the earnings component, which has always been controversial, but they’re a good middle-ground approach that balances the interests of both plan participants and plan sponsors. The initial set of rules may not cover every issue, but they’ll give us a good understanding of how taxpayers use and rely on the illustrations — and we can move forward from there.

Bloink: Yes, we need a set of rules that’s workable from the perspective of the employer and the plan sponsor. We also need a set of rules that works and does what the law sets out to accomplish — namely, encouraging taxpayers to save more for retirement to fund the future income they’ll need.

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Byrnes: Again, we have to balance the interests of retirement plan participants with the realities associated with administering employer-sponsored retirement plans. The last thing we want is to create a situation where we’re actually discouraging employers from offering retirement savings options because the burdens associated with offering the plan are just too significant.

Bloink: If we’re discouraging younger taxpayers from saving under the new rules, those rules are doing the exact opposite of what they were designed to do. Factoring in the earnings component on a retirement account balance can be complex, yes, but it’s definitely something that’s feasible and worthwhile in the long run. That’s how we’re going to actually encourage increased retirement savings among the younger generations.

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