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These Terms of Use ("Terms of Use") are made between the undersigned user ("you") and Lord, Abbett & Co. ("we" or "us"). They become effective on the date that you electronically execute these Terms of Use ("Effective Date").

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C. We wish to provide access to the Intelligence System to you as an information tool responsive to the demands of your successful business pursuant to these Terms of Use. Accordingly, you and we, intending to be legally bound, hereby agree as follows:]

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· Survival. This Section 8 will survive any termination of these Terms of Use or your use of the Intelligence System. The undersigned hereby signs these Terms of Use. By electronically signing and clicking "Accept" below, these Terms of Use will be legally binding on me. To sign these Terms of Use, confirm your full name and enter your User ID and Password (as your electronic signature) in the fields indicated below and click the “I Accept” button.

 

Retirement Perspectives

Proposed rules require that plan sponsors illustrate to participants in defined-contribution plans what their monthly income stream would look like in retirement.

The Department of Labor (DOL) is considering how best to implement new rules requiring that all defined contribution benefit statements include illustrations of the lifetime income stream the plan participant might expect from the account after retiring.

The proposed rules are part of an effort by the DOL to enhance retirement security for workers who are retiring in an environment that has shifted from defined-benefit plans that generally offer employees a guaranteed monthly payment for life (essentially, lifetime annuities) to defined-contribution (DC) plans, in which participants make the decisions about contributions, allocations, and withdrawals. DC plans, such as 401(k) and 403(b) plans, typically distribute retirement savings in a lump-sum payment that reflects the current balance of the account at retirement.

"Managing finances in order to provide income for life... is a tremendously difficult, but important task," states the advance notice of proposed rulemaking published by the Employee Benefits Security Administration (EBSA) on May 7, 2013. "Individuals may not understand what savings, asset allocation, and drawdown decisions are necessary to achieve these goals. In particular, participants in defined-contribution plans may have difficulty envisioning the lifetime monthly income that can be generated from an account balance."

The DOL is contemplating adding two rules pertaining to pension benefit statement requirements as they exist under §105 of the Employee Retirement Income Security Act (ERISA) of 1974. One proposed rule would require that a participant's account balance be presented not only as a single sum but also as an estimated lifetime income stream of level payments, if the employee were to retire at that point in time (with life-expectancy assumptions applied).

The second rule would require plans to illustrate a projected lifetime income stream that takes into account the amount of contributions, investment returns, and retirement age—parameters over which the participant has some control—as well as life expectancy. Essentially, the intent is to get people to understand the impact their behavior can have on their individual retirement savings balance.

"We are looking for the best ideas on how to show people what their lump-sum retirement savings look like when they are spread out over all the years of retirement," said Phyllis C. Borzi, assistant secretary of labor for employee benefits security. "Retirees run the risk of outliving their savings. 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."1

Some employers, including the federal government's Thrift Savings Plan (TSP), already voluntarily project lifetime income on participants' statements. The EBSA also offers a Lifetime Income Calculator on its website: http://www.dol.gov/ebsa/regs/lifetimeincomecalculator.html.

That calculator, which serves as the EBSA's template for the advance notice of proposed rulemaking (ANPRM), illustrates an annuitization approach to estimate the monthly lifetime income stream based on the participant's current account balance and on the projected value of the account at retirement. While the current account balance is nonnegotiable, users of the calculator can adjust certain parameters, such as retirement age, years to retirement, and annual contributions, to get a picture of where things stand now and what they potentially could be in the future.

If We Build It, Will They Use It Properly?
The rules would apply to half a million ERISA-covered, private-sector, employer-sponsored DC plans that are participant-directed, meaning that participants are responsible for directing the investment of their retirement assets and deciding what to contribute and withdraw. Participant-directed plans are required to produce benefit statements at least quarterly and to show the participant's total accrued benefits. The new rules would require the total accrued benefits be translated into lifetime income streams for illustrative purposes.

Commenters who have so far responded to the ANPRM have expressed some concerns about the proposals, not the least of which is the specter of having to comply with yet another regulatory mandate.

Industry experts worry that compliance is going to lead to an increase in third-party administrator and record-keeper fees, as occurred with the new fee-disclosure rules that were imposed on them in 2012. And they wonder how the DOL, with its stretched resources, will enforce the new rules.

Some employers also have expressed concerns about how participants will receive the information. Will workers think that hypothetical projections based on reasonable assumptions represent guaranteed income streams? How will plan sponsors protect themselves from potential participant lawsuits for unmet expectations? How best to clearly communicate that the illustration is only an estimate?

The Rules
The ANPRM outlines proposed guidelines and establishes certain language and concepts EBSA is considering incorporating in the proposed regulations,2 including:

  • Participant pension benefit statements would show current account balance and an estimated lifetime income stream of payments based on such balance. The lifetime income illustration would assume the participant had reached normal retirement age as of the date of the statement, even if the participant is much younger.
  • For participants who have not yet reached normal retirement age, their pension benefit statement also would show a projected account balance and the estimated lifetime income stream based on that balance. The participant's current account balance would be projected to normal retirement age based on assumed future contributions and investment returns. The projected account balance would be converted to an estimated lifetime income stream of payments, assuming that the participant retires at normal retirement age. This account balance and the related lifetime income payment would be expressed in current dollars.
  • Both lifetime income streams—the one based on the current account balance and the one based on the projected account balance—would be presented as estimated monthly payments based on the expected mortality of the participant. In addition, if the participant has a spouse, the lifetime income streams would be based on the joint lives of both.
  • Pension benefit statements would contain an understandable explanation of the assumptions behind the lifetime income stream illustrations. Pension benefit statements also would contain a statement that projections and lifetime income stream illustrations are estimates and not guarantees.

Assumptions and Safe Harbors

The lifetime income illustrations contemplated by the EBSA, as indicated in the ANPRM, depend on the use of certain assumptions. For example, contribution and investment-return assumptions are needed to project an account balance to a participant's retirement age, and mortality and interest-rate assumptions are needed to convert an account balance (whether current or projected) into a lifetime income stream. The rulemaking proposal requires that plan administrators use only reasonable assumptions, taking into account certain professional standards when developing lifetime-income illustrations. The ANPRM, however, provides two safe harbors—one for projections and one for conversions—under which certain assumptions are deemed reasonable:

1. Projection Safe Harbor—When projecting account balances, it is reasonable for a plan administrator to assume:
—Contributions continue to normal retirement age at the current annual dollar amount, increased at a rate of 3% per year.
—Investment returns are 7% per year (nominal).
—A discount rate of 3% per year, in order to show the projected account balance in today's dollars.

2. Conversion Safe Harbor—When converting current and projected account balances into lifetime income streams, it is reasonable for a plan administrator to assume:
—A rate of interest equal to the 10-year constant maturity Treasury securities rate.
—Mortality, as reflected in the applicable mortality table under section 417(e)(3) of the Internal Revenue Code.
—If married, the participant’s spouse is the same age as the participant.
—Payments commence immediately and that the participant is normal retirement age (if younger than normal retirement age).

The DOL initiative is a welcome one, given the increasing responsibility individuals are taking for their own retirement security. It represents another tool that plan participants can use to evaluate the progress they are making toward their overall retirement planning needs and goals. Whatever final rules ultimately are adopted by the DOL, plan sponsors, fiduciaries, and record-keepers should start planning for the inevitable day when they are required to produce statements that illustrate lifetime income streams.

 


1 U.S. Department of Labor Employee Benefits Security Administration News Release, May 7, 2013.
2 Fact Sheet: Lifetime Income Illustration, U.S. Department of Labor Employee Benefits Security Administration, May 7, 2013.

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