Retirement Income Illustrations on Statements

March 23, 2017

Within the past few years, the Department of Labor’s Employee Benefits Security Administration announced a notice of proposed rulemaking that would require inclusion of lifetime income illustrations in participant statements within their defined contribution retirement plans. This proposed requirement could drastically impact communication standards between the defined contribution and retirement industry and its clients. Below we’ve summarized the proposed rule’s key points and how they are being weighed.

Why is this proposal important to our industry?

First, it’s helpful to consider the definition of “Retirement Readiness”- The state and/or degree of being ready for retirement.

Retirement readiness typically refers to being financially prepared for retirement, or the degree to which an individual is on target to meet his or her retirement income goals. These predetermined retirement income goals help to ensure that individuals can continue the standard of living they have enjoyed while working and maintain that standard after retirement.

It’s vital to the industry that the reporting systems and communications employed work for the end users and help them to assure their futures are secure. Confusion with these communications can, over time, devalue a vital industry.

Why does it make sense for consumers?

Often, when individuals speak of retirement income goals, they look to overall retirement readiness to help set and determine those goals. Yet the industry standard is to convey to participants a balance of what they have accumulated over time.

That big number doesn’t easily translate for most individuals and can seem like far more than it actually is based on the term it is expected to run. Most participants are not in the business of financial planning and can’t look at a balance and determine what that may mean in terms of income replacements. Participants believe that a balance of $200,000 is a lot of money, but if we spoke in terms of monthly income, this might better resonate with them.

Below is an example of how the proposed income illustration would work:

We used the Employee Benefits Security Administration calculator:  https://www.askebsa.dol.gov/li...

Our assumptions were, a 55 year old, making $75,000 annually, contributing 6% ($4,500 annually), with a balance of $200,000 and retiring in 10 years.

As we previously stated, the participant might view $200,000 as a lot of money, but if you communicate it in terms of income, it’s now (for an individual) only $1,937 a month. For someone earning $75,000 a year and accustomed to a monthly income of $6,250 a month, this now only represents only 30% of their current income.

What does the Department of Labor say?

According to Phyllis C. Borzi, Assistant Secretary for Employee Benefits Security of the United States Department of Labor under the Obama administration, “When you show a worker today how that amount would be broken down into monthly payments over about 20 years, it’s an eye opener. We’re hoping a lifetime income illustration might spur better planning for the future.”

The notice from the Department of Labor solicits input on a rule that would require a participant’s accrued benefits to be included on his or her pension benefit statement as an estimated lifetime stream of payments, in addition to an account balance.

The Employee Benefits Security Administration is also requesting comments on a rule that would require a participant’s accrued benefits to be projected to his or her retirement date, assuming annual contributions and an estimated rate of return, and then presented as an estimated lifetime stream of payments.

What concerns does the industry have?

There are two concerns that have been expressed frequently to the Department of Labor by the retirement planning community:

The expense to plan sponsors of providing uniquely personal information on the benefit statements.
The litigation exposure for the plan fiduciaries from plan participants and beneficiaries where actual assets do not meet expectations based on the lifetime income disclosures.
The Department of Labor has responded to these concerns by stating that it feels these concerns are overstated. As to costs to the plan for producing the disclosures, the Department sites that the Employee Retirement Income Security Act already requires pension benefit statements to include participant account information, therefore this would merely be an addition to this existing requirement. Furthermore, some plan sponsors have been providing information similar to what is required under the notice without finding it burdensome.

In addition, the Department of Labor believes concern voiced about potential lawsuits would be mitigated by the disclosure of assumptions that put participants on notice that the illustration is not a guarantee. The Department of Labor will also consider creating a safe harbor on which plan administrators may rely when developing lifetime income illustrations for pension benefit statements.

While the Department of Labor has not yet implemented this, many providers have included retirement income illustrations on participant’s websites and provided the illustrations on their statements.

If your company has not explored the addition of retirement income illustrations to your client reporting and communications, the time is now. Ultimately, these illustrations provide a better experience for customers and can motivate them to save more money for retirement. They also help to demonstrate the value of good financial planning advice and ensure proper understanding so financial planners and their clients can work effectively together to ensure the future is bright for everyone.

It is also worth noting that under the new administration these types of proposed rules may be fast-tracked into law, so why wait?

If you’d like to start the conversation about adding these illustrations and other beneficial features to your client communications, ask O’Neil Digital Solutions how we can help compose and deliver your messages to participants. We can aid you in helping your customers save for retirement and meet their retirement readiness goals.