The comment letter from IRIC, a nonprofit think tank for the institutional retirement industry, is in response to the DOL’s advance notice of proposed rulemaking focusing on lifetime income illustrations given to participants in defined contribution (DC) plans (see “DOL Extends Lifetime Income Comment Period”).
The proposed rules would require benefits statements to include the projected account balance at a participant’s retirement age and an estimated lifetime income stream. The statement would need 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 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.”
In its comment letter, IRIC recognized 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 recommended that language 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 suggested that the regulations should mandate a set of assumptions for defined contribution plans to use when making the disclosures. The proposal suggested plans be permitted to use “reasonable” assumptions, although it does provide safe harbor approaches to making the disclosures. IRIC said that if plan sponsors and providers are free to use different assumptions in coming up with their projections, this would be a disservice to the participants, since the information given to them could vary and create confusion for them, as well as disincentives to review and take action based on the illustrations.
The comment letter also included other recommendations from IRIC such as:
- Directing participants 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; and
- 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,” said Charyk.