Have You Noticed a Change to Your Retirement Plan Statement?

As a result of a provision of the SECURE (Setting Every Community Up for Retirement Enhancement) Act, passed in 2019, retirement plan providers are required to begin providing lifetime income illustrations on retirement plan statements by September 18, 2022. Many plan providers send quarterly statements; therefore, if you have not yet noticed a change to your retirement plan statement, it is soon to come.

Will This Be Useful?

The provision is intended to give investors a realistic illustration of how much monthly retirement income they could expect to purchase with their account balance. The provision requires that sponsors of retirement benefit plans must disclose the estimate of the monthly amount the participant’s account balance will pay them in the form of a life annuity or a qualified joint and 100 percent survivor annuity. The estimates are calculated as if the lifetime income payments were to have begun on the last day of the statement period, and as if the participant is 67 years old at that date, unless the participant is older, in which case the actual age should be used.

While the intent of the provision is to help retirement plan participants identify if they are on track to retire, many experts question if the provision will be useful. This is in large part because of the methodology of the illustrations. For instance, if a 35-year-old has $50,000 in their account, the illustration will tell them what $50,000 would buy them at age 67. This does not consider any future earnings or growth of the account balance for 32 years in this example. Not only is there question about the usefulness of the methodology but the confusion it may cause for participants who are not aware of the methodology.

Additionally, experts argue whether or not pointing to annuities as a distribution method is the right way to go. Annuities, which are insurance products with a guaranteed stream of income, aren’t necessarily right for everyone. Some of the drawbacks to annuities are their complexity, costly fees, often weaker returns than possible through traditional investing and their lack of liquidity. Many plan sponsors don’t offer annuities as a distribution method from their retirement plans for this reason.

What to Expect

As of now, the Department of Labor has issued the rule as an interim rule to take effect this fall but has yet to issue a final rule. Many in the retirement planning community anxiously await the final rule from the Labor Department because of the concerns regarding the illustrations. The Department of Labor did receive feedback from the private sector and is expected to issue a final rule with some changes if they believe the feedback will improve the rule. In the meantime, Greenleaf Trust and other retirement plan providers are preparing to provide the illustrations as stated in the interim rule and retirement plan participants can expect to receive these illustrations on their statements very soon.