Lifetime Income Disclosure Rule

The DOL has released an interim final rule that requires 401(k) plans and other ERISA-covered defined contribution plans to provide certain lifetime income disclosures. The disclosure rules were actually created by the SECURE Act, which directed the DOL to release an implementing rule during 2020. Under the interim rule, plans must disclose the estimated monthly payment the plan participant could hypothetically receive based upon their account balance and life expectancy, assuming that payments begin at age 67. The rule also provides information about actuarial assumptions, interest rates and life expectancy tables that will be used to determine the projections. The rule also provides that an estimate must be given for qualified joint and survivor annuities, assuming the participant is married to someone and that the spouses are the same age.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the DOL interim final rule.

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

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: The DOL rule gives retirement plan participants the information they need to make smart and informed decisions about their retirement savings and whether they’re ready to retire. Too often, people contribute blindly to a 401(k) without any real idea of the actual income stream that they’re building for themselves—and whether that income will be sufficient to live on during retirement. The DOL rule raises the awareness that people planning for retirement need.

Bloink: The DOL interim rule actually isn’t particularly helpful for anyone. It doesn’t go nearly far enough in providing the kinds of detailed and personalized information that plan participants need to see to encourage savings. All it does is require plan participants—whether they’re 20 or 60—what their account balance would generate on a monthly basis at age 67, given today’s interest rates and today’s account information. What about future values?

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Byrnes: We’re looking to motivate savings here. We need to train people to think of 401(k)s and other retirement accounts as an income stream, not a simple lump sum asset. After all, 401(k)s are designed to replace monthly pension payouts. Most participants have no idea how they’ll actually use these accounts—they might contribute on a regular basis, but have no idea what their actual decumulation plan will be.

Bloink: The rule could be much more robust. Sure, it’s useful for participants to know how much they could receive on a monthly basis at age 67 based on their current account value. It would be even more useful for plan participants to have a target account value at retirement and information about how much income that target account value would generate?

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Byrnes: When plan participants see the actual monthly dollar amount that their current account balance can generate, they’ll be much more likely to increase their savings. The aim will be to reach a projection rate that more accurately reflects their standard of living and expectations in retirement. This rule provides a reasonable set of assumptions and explanations that participants can use as they see fit.

Bloink: If we want to encourage savings, we need to give current plan participants a goal. A much more useful disclosure regime would give participants an idea of what their projected account value should be in order to achieve a certain standard of living at a future retirement date. We have to consider that 20-year-old participants need different information than 60 year old plan participants—what’s useful for one may have very little bearing on the other’s future reality. There’s still room for change, and I think we should take the opportunity to reform the rule to be as useful as possible for as many taxpayers as possible.