More Problems with Lifetime Income Disclosures

I recently shared my concerns about the required lifetime income disclosures.[i] I stated, in part:

Note: There is no requirement for an “attribution analysis” that would identify the reason for the change in the lifetime income projection.

I am one of a handful of individuals whose retirement plans were sued when we communicated a projected lifetime income by converting account balances to single-life annuities.

So, to give you an idea of what you may encounter, consider this example (author’s assumptions with help from a pension actuary friend).

This individual had worked elsewhere for twelve different employers and had always cashed out and invested proceeds in his brokerage account or he had rolled over assets to IRAs – so, there is no retirement income estimate for those assets[ii].

His service provider calculates and prints the required annuity estimates on every quarterly statement. They started with the December 31, 2021 statement. At that time, his account balance in his current employer’s 401(k) plan was $100,000. However, due to equity and bond performance year to date, and despite making contributions for the past six months, his account is only $75,000 on 6/30/22 – which also happens to be his 67^th birthday.

Drumroll, please:

Monthly single-life annuity, December 31, 2021 Statement: $510

Monthly single-life annuity, June 30, 2022 Statement: $446

Percentage Decline in Monthly Income -12.5%

The change resulted from the combination of:

A decline in equity and bond investments, offset by

Continued employee and company contributions, plus
A doubling of interest rates used in the calculation.

Result

This participant received:

An incomplete picture (as the projection only applies to some of his assets),
A warning about volatility (without any guidance on how (not) to respond), but mostly,
Confusion.

Confused, he took the projections to his financial planner who was not able to find an annuity with the same result (in part due to the use of unisex mortality).

My 31+ years of experience in plan sponsor roles confirmed that:

Many participants do not look at their quarterly statements, preferring the immediate feedback of checking online information with current account balances and asset allocations,
Those who do look at their quarterly statements often stop at the first page if the account balance meets their expectations, remaining unaware of information on fees, projected income, etc.,[iii]
Most of those who do get past the first page will not stop to read the fine print disclaimers,
Even fewer have experience with defined benefit or defined contribution pension plans and annuities, so
Only a handful will understand the retirement income estimates, what is in, what is left out, and why the estimates change.

Finally, if the goal is to increase savings, the one study of participant behavior cited in the regulations confirms that those who receive income projections were only slightly more likely to increase contributions, and then only a minimal amount.

If the goal is to increase retirement savings, there is ample evidence of what works—automatic features.

I always appreciate your criticisms, suggestions, corrections, and improvements. Feel free to contact me at: jacktowarnicky@gmail.com.

Disclaimer No. 1: My comments are my own based on my experience in plan sponsor and consulting roles – they do not necessarily reflect those of any employer, group, or association I have been employed by or affiliated with, past, present, or future.

Disclaimer No. 2: This information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for) legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used, and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market, or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.

[i] J. Towarnicky, The Problems With Lifetime Income Disclosures: A voluntary estimate of lifetime income based on accumulated savings has merit, but …, 401kSpecialist.com, 5/31/22, Accessed at: https://401kspecialistmag.com/the-major-problems-with-lifetime-income-disclosures/

[ii] Bureau of Labor Statistics, US Department of Labor, Number of Jobs, Labor Market Experience, Marital Status and Health: Results from a National Longitudinal Survey, 8/31/21, Accessed at: https://www.bls.gov/news.release/pdf/nlsoy.pdf

[iii] GAO, 401(K) RETIREMENT PLANS: Many Participants Do Not Understand Fee Information, but DOL Could Take Additional Steps to Help Them, July 2021, GAO 21-357, Accessed at: https://www.gao.gov/assets/gao-21-357.pdf