U.S. Labor Department Rolls Out Crystal Ball for Future Retirees
A proposed agency rule would ask 401(k) plan sponsors to provide several sets of numbers to show participants what their future nest egg might look like.
While 401(k) participants try to build up their accounts, the U.S. Labor Department is considering having plan sponsors give workers a better sense of what their nest egg might look like at retirement as well as how much they might get on a monthly basis throughout those years.
Last month, the Labor Department posted what's known as an advanced notice of a proposed rule. It outlined that it may require plan sponsors to show workers what their final account balance would look like at retirement as well as what the balance would translate to in monthly payments. The proposed rule is intended to get workers more focused on putting enough away over their working years to last throughout retirement.
"Retirees run the risk of outliving their savings," said Phyllis Borzi, assistant secretary for employee benefits security, in a written statement announcing the proposed rule. "If workers have the benefit of seeing how long their savings could last, it might spur better planning for the future such as adopting more effective savings strategies."
It's a good idea, industry experts say, because many workers need to change their mindset on their accounts—from just another savings account to something that will become their main source of monthly income in retirement.
"We are supportive of DOL's intent," says Neil Smith, executive vice president of strategic business support services with retirement service provider Ascensus Inc. "The real question is how to make it illustrative and meaningful without it being onerous."
The 13-page notice, found in the May 8 Federal Register, shows that the proposed rule would ask 401(k) plan sponsors to give several sets of numbers to participants. The report might be so confusing that participants might not get a real sense of their retirement picture. For example, plan sponsors would need to show two separate lifetime-income projections as well as a calculation for single- and joint-life expectancy.
"The intent is really right on the target," says Ted Goldman, managing director of retirement at Buck Consultants. "But we have to give them information they can process."
Currently, the Labor Department is asking for input on the notice, but it's not the first time the government has asked for opinions on the topic. In 2010, the department held two days of hearings and received more than 700 public comments ranging from how to communicate the information to worries over lawsuits.
Since then, several service providers have created calculators for participants to figure out on their own what their final amount might look like. Last year, Ascensus launched its calculator. The tool allows participants to plug in a few basic numbers that will result in several figures for workers to consider.
"It gives participants that graphic element, and leads them to making decisions to improve outcomes," Smith says.
While calculators are a great start, they are only helpful if they are used, Goldman says. The next logical step, he adds, is to put the information where participants are most likely to see it: in targeted communications.
"I think we have to help people understand the consequences of the decisions they make," Goldman says. "There are a lot of calculators out there; the problem is that people just don't do it."
Later this month, Buck plans to roll out online information statements—a separate communication from quarterly statements—giving employees a complete look at their retirement readiness. Goldman would not say the tool's name, but said it would project 401(k) balances as a lump sum and would include Social Security and other plan information—including defined benefit assets, as well.
"This product is practical. It helps them in a way that they haven't in the past," Goldman says. "It's a holistic, total picture of retirement and presents it in a way that is compelling. This will help them understand the consequences of the decisions that they make."
Comments on the Labor Department's proposal are due July 8 and may be submitted by emailing email@example.com with RIN 1210-AB20 in the subject line of the message.