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Americans with 401(k) plans may think they have a lot saved for retirement, but a new government rule will let them know just how much money they’ll see in their old age.
The Department of Labor released its interim final rule requiring administrators of defined-contribution plans, like 401(k) plans, to show how their account balance translates into lifetime income. This change allows an individual to see her entire account balance as monthly income upon retirement age.
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The goal: allow workers to see what their savings amounts to in actual payments so that they can gauge if that money will be enough to live off of in retirement.
“The Employee Benefits Security Administration [EBSA] believes that illustrating a participant’s account balance as a stream of estimated lifetime payments, in accordance with the interim final rule, will help workers in defined-contribution plans to better understand how their account balance translates into monthly income in retirement and therefore to better prepare for retirement,” the DOL said in its announcement.
The rule was part of the Secure Act, sweeping retirement legislation Congress passed in December. The law required plan administrations to include two illustrations of the account balance — one as a single life annuity, which means payments would end upon the death of the participant, and another as a qualified joint and survivor annuity, where payments for a married couple would continue until the second spouse dies.
To create these calculations, administrators will use assumptions such as when the annuity payment begins (for these statements, illustrations will act as though the payments began on the last day of the benefit statement period) and how old the participant will be at the start of the annuity (in this case, age 67, which is the Full Retirement Age for many people when claiming Social Security benefits).
The DOL said administrators will use the 10-year constant maturity Treasury rate based on the first business day of the last month’s statement period for its interest rate assumptions. It will also use the Internal Revenue Code’s gender-neutral mortality table and in order to calculate the Qualified Joint and Survivor Annuity, will assume participants have a spouse of equal age (regardless of marital status).
For example, a 40-year-old single female participant with an account balance of $125,000 on Dec. 31, 2022 would receive $645 a month for her entire life, assuming she retired at 67 on that date, or $533 a month for the rest of her life, and then $533 until her spouse dies.
Having account balances translated into monthly payments gives workers the opportunity to plan their retirement income more confidently. Seeing hundreds of thousands of dollars may give a saver a false sense of hope that they’ll be able to live comfortably in retirement, but having estimated figures that a person can compare to his current cost of living will provide a more accurate picture of retirement security. Individuals will be able to use these estimates to calculate their expected retirement budgets, and include other factors, such as Social Security, a pension or part-time work in their older age.
This legislation does not help everyone, however. More than a third of private sector workers don’t have access to an employer-sponsored retirement plan, according to Pew Charitable Trusts. While there are $5.6 trillion in invested in 401(k) plans, according to the Investment Company Institute, the average account balance for participants in their 40s with two to five years at their employers was $38,000. Participants in their 60s with more than 30 years on the job had an average balance of $287,000.
The DOL said this rule will be effective one year after it is published in the Federal Registrar, and that it intends to issue a final rule before that date. The new law will cost approximately $201 million in its first year, and then $6.6 million in the second year and $4.8 million in the third year as development costs decrease and plan administrators become more experienced in providing these illustrations.
