It’s no secret that Americans are facing a retirement dilemma. With this as their impetus, a bipartisan group of House members introduced new legislation designed to improve retirement outcomes for many Americans. After sitting in limbo, Congress enacted the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Back in December, President Trump signed the bill into law.
The SECURE Act features a wide range of new policies and rules governing everything from required minimum distributions to the adoption of annuities into workplace retirement plans. But one of the new pieces of the SECURE Act includes rules on income projections for savers.
After a period of public comments, the Department of Labor’s Employee Benefits Security Administration (EBSA) announced the final rules that will require defined contribution retirement plans to provide two lifetime income illustrations on participants’ statements at least once every 12 months. Basically, you’ll get your 401k or 403b statement and see just how much income your balance could generate.
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Some account providers have already started to do this ahead of the DOL’s new rules. However, the methodology is varied under plan sponsors. Depending on the type of models used, interest rate assumptions, and other factors, these estimates can and do vary widely from sponsor to sponsor. Under the Labor Department’s guidelines, a set of standards is created that translates across investment plans.
And just what are those standards?
The DOL’s rules use a few major assumptions. First, the rules now create a set commencement date and an assumed age. Plan administrators must calculate monthly payment illustrations as if the payments begin on the last day of the benefit statement period. Secondly, plan administrators must assume that participants start the income assumptions at age 67, which is the full current retirement age according to Social Security.
Third, plan participants provide two income assumptions. This includes a single life assumption for just the saver as well as Qualified Joint and 100% Survivor assumption. This shows what a portfolio would generate in the case of married participants. This income illustration shows what a portfolio could generate monthly for both partners. Key to these assumptions is that plan sponsors must use a gender-neutral mortality table to determine life expectancy.
Perhaps the most significant feature of the new rules comes down to interest rate determination. Where income projections tend to function widely is that many plan sponsors use different rates to create a baseline for growth and income potential. Under the DOL’s rules, sponsors must use the 10-year constant maturity Treasury rate (10-year CMT) as of the first business day of the last month of the statement period to calculate the monthly payments. This creates a standard for all participants.