ISELIN, NJ, August 1, 2013 – The Institutional Retirement Income Council (IRIC), a non-profit think tank for the institutional retirement industry, has submitted a comment letter to the Department of Labor (DOL) recommending that lifetime income illustrations and projections be mandated as part of pension benefits statements that plan sponsors distribute to their defined contribution (DC) plan participants. The three-page letter includes several recommendations that support showing DC plan participants what their retirement income and savings will look like when they retire.
The comment letter is in response to the DOL’s advance notice of proposed rulemaking focusing on lifetime income illustrations given to participants in DC plans including 401(k) plans. The proposed rules would require that benefits statements include the projected account balance at a participant’s retirement age and an estimated lifetime income stream. The benefit statement would be required to provide an understandable explanation of the assumptions used to project the account balance to normal retirement age and to convert account balances into annuities or other lifetime income streams. In addition, the benefit statement would contain a disclaimer that projections are only estimates and not guarantees.
“We believe that lifetime income illustrations and projections should be mandated as part of participants’ benefit statements,” said William R. Charyk, President of IRIC. “Given the risks DC plan participants face, including a lack of understanding of how much they need for retirement, how long their funds will need to last and how to spend the funds when they do retire, it is imperative that participants receive this information. To make the disclosures voluntary would be seriously detrimental to them.”
In its comment letter, IRIC recognizes that the projection of future income streams based on an account balance is inherently uncertain, and believes it would be a disservice to participants if this uncertainty were not explained. To address this concern, IRIC recommends that a statement be included stating that the projection is based on a number of assumptions, including that the participant will use the account balance to purchase an immediate life annuity at retirement, and that monthly income amounts shown may or may not be achieved.
IRIC also suggests that the regulations should mandate a set of assumptions for DC plans to use when making the disclosures. The proposal suggests that plans be permitted to use “reasonable” assumptions, although it does provide safe harbor approaches to making the disclosures. IRIC believes that if plan sponsors and plan providers are free to use different assumptions in coming up with their projections, this would be a disservice to the participants, noting that the information given to participants could vary and create confusion for participants and disincentives to review and take action based on the illustrations.
The comment letter also includes other recommendations from IRIC such as:
- Directing participants in a clear, easy to understand way to the DOL’s interactive online calculator which they can use to explore how changes in behavior or economic conditions might impact their retirement income.
- Including the illustrations, disclosures and other information within the quarterly benefit statements provided to participants rather than as a separate notice.
- Using the Social Security retirement age for the individual in all projections.
“Overall, IRIC agrees with the concepts set out in the proposal. Our members believe in and promote the concept that defined contribution plans, including 401(k) plans, need to become distribution vehicles and not merely savings vehicles. As a result, we strongly embrace the concept of providing plan participants with meaningful illustrations of the income that retirement savings will generate once they terminate employment,” concluded Charyk.
About The Institutional Retirement Income Council
The Institutional Retirement Income Council (IRIC) is a non-profit, membership-based organization of industry advisors who are dedicated to sharing best practices, informing about legislative and regulatory issues, and facilitating solutions for plan sponsors and their participants. IRIC’s mission is to facilitate the culture shift of defined contribution plans from supplemental savings programs to programs that provide retirement security. By providing a forum for insightful, solutions-oriented thought leadership on institutional retirement income, the IRIC is promoting the need for retirement income adequacy for defined contribution plan participants.