We strive to provide the highest level of client satisfaction, and handle each request with the utmost importance. We expect to respond to each request we receive within one business day of receipt.
Please note that trades cannot be processed via e-mail for security reasons. If your inquiry requires immediate assistance, please call us at
1-800-821-5129 (8:30 a.m.-6:00 p.m. EST, Mon-Fri).
Thank you for contacting Lord Abbett. A member of our staff will contact you between X:XXpm EST and XX:XXpm EST [today OR XX/XX/XXXX]. A confirmation has been sent to your email address.Close
Use this form to give us your feedback or report any problems you experienced finding information on our Website.
* Indicates Required Fields
Thank you for providing feedback.
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 as not only 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 advanced 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 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 ANPRM outlines proposed guidelines and establishes certain language and concepts EBSA is considering incorporating in the proposed regulations2, including:
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:
2. Conversion Safe Harbor—When converting current and projected account balances into lifetime income streams, it is reasonable for a plan administrator to assume:
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.
Glossary of Terms
A 401(k) plan is a qualified plan established by employers to which eligible employees may contribute a portion of their salaries on a pretax or Roth aftertax basis, through individual payroll contributions. Earnings accrue on a tax-deferred basis.
A 403 (b) plan offers all the pretax and Roth aftertax payroll investment features of a 401(k) plan to most nonprofit organizations, typically schools and charities. Generally, if the program offers payroll contributions only, it is called a "non-ERISA" 403(b) arrangement. If there are employer contributions, it is called an ERISA 403(b).
Safe Harbor provisions protect management from liability for making financial projections and forecasts made in good faith.
A Note about Risk: Investing involves risk, including the possible loss of principal.
This material is provided only for general and educational purposes and is not intended to provide legal, tax, or investment advice or for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or tax advisor regarding your specific legal, investment, or tax situation.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.