Earlier this month, both the Senate and the House introduced bipartisan legislation to amend the Employee Retirement Income Security Act that would mandate annual income disclosures on 401(k) and other defined contribution account documents. The language in the legislation is identical to a bill introduced in 2009, early in the Obama administration. This new effort reflects the ongoing concern that Americans are lagging significantly behind in their retirement savings. At a minimum, the logic behind the proposed legislation is that estimates of plan participants’ future retirement income may motivate them to pay closer attention to savings rates and may encourage more aggressive deferrals to make up for savings shortfalls as evidenced by the income estimates.
However, despite the good intention, there are significant hurdles in coming up with an easy-to-understand and implementable methodology. For the lifetime retirement income estimate to be useful, it has to be realistic, and that means quite a few assumptions have to be made, including the savings rate, investment returns, and stability in job tenure. Besides, it is one thing to estimate the retirement income for a 65-year-old with close-to-retirement account balances, but it is something else to estimate the same thing for a 35-year-old, 30 years away from retirement.
For participants who are close to retirement, a standard, simple income calculation based on a participant’s current account balance using today’s rates in the immediate annuity market would be an easy and acceptable way to provide the income estimate. For a younger participant with a much lower balance, using the same approach, without taking into account the anticipated future savings, would clearly result in a much lower income estimate and may or may not be helpful to the younger participant. Thus, we may want to allow plan sponsors to provide different types of income estimates based on the participants’ proximity to retirement.