Could Clarity Confuse? The Industry Strikes Back

The intention of the Department of Labor (DOL) proposal to illustrate lifetime income streams on 401(k) statements is to clarify retirement income status for participants. But according to industry and trade groups, the requirement may have the opposite effect, creating more confusion than clarity.

In May, the DOL issued an advance notice of proposed rulemaking (ANPRM) that prescribed how to calculate income projections based on current and projected account balances. In response, several groups submitted letters contending that the DOL’s uniform methodology is too complex and restrictive.

After first suggesting that the income projections should be voluntary rather than mandatory, the SPARK Institute — a leading voice in Washington for the retirement plan services industry — proposed that if the rule requires projections, there should be a “broad and flexible safe harbor” to accommodate all lifetime income illustrations and projections that are based on reasonable investment theories and actuarial practices. SPARK expressed concern that the safe harbor proposed by the DOL, which requires use of narrow, specified assumptions, would be inconsistent with the DOL’s stated goals of preserving current modeling tools and not stifling innovation.

Similarly, the Insured Retirement Institute contended that “including specific assumptions in the safe harbors described in the notice will steer plan sponsors to utilize those assumptions to ensure compliance at the expense of flexibility and innovation.”

Putnam joined the chorus advocating the use of multiple methodologies in calculating lifetime income with this response: “It is critical that the final rules be modified to allow greater methodological flexibility, avoid safe harbor assumptions that may codify less than ideal standards, and focus on those numbers that are most likely to motivate positive savings and investment decisions by participants.”

The American Society of Pension Professionals & Actuaries called for concise disclosures, with illustrations of 3%, 5% and 7% annual rates of return. The group noted that there shouldn’t be assumptions of future contributions by the employer or employee because future contributions are rarely guaranteed.

Global benefits consulting firm Aon Hewitt stated in its comment letter that the lifetime income illustrations should be based on a participant’s actual age and projected annuity benefit at normal retirement age. The firm contended that basing the illustration on current account balances for participants who haven’t reached normal retirement age would have little value because it wouldn’t accurately reflect their lifetime income. Aon Hewitt also noted that the DOL’s proposal should have included annuity fees in the calculations to avoid misleading participants.

Fidelity raised a more basic question by claiming that there is no legal basis for the rule, pointing out that “nothing in the (ERISA) statutory language references any type of income illustration or requires a benefit statement to project an accrued benefit (that is, the account balance) into the future.” Fidelity also suggested that the DOL would need to coordinate a proposed rule with the Financial Industry Regulatory Authority, which generally prohibits account statements distributed by broker-dealers from predicting investment performance.

Now that the Aug. 7 comment deadline for the ANPRM has passed, the DOL will consider the more than 80 letters it received and likely proceed with a proposed regulation, which will be distributed for further industry and public review. Hopefully, the new “product” will outline a clearer and more flexible methodology for incorporating lifetime income projections on participant statements.

Important information

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for pension plans in private industry.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.




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