Congress reignites debate over lifetime income disclosures in 401(k) plans

Legislation is being considered to continue a stalled Labor Department effort to require income illustrations on retirement account statements

Dec 7, 2016 @ 3:32 pm

By Greg Iacurci

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The Labor Department may be abandoning its regulatory project around lifetime income disclosures, but Congress isn't letting it die.

In October, Assistant Secretary of Labor Phyllis Borzi said the department wouldn't be able to issue rules concerning lifetime income illustrations on participant account statements by the end of President Barack Obama's term.

The rule would have mandated 401(k) benefit statements to display a participant's estimated income stream at retirement based on the account balance.

The goal was to help refocus participants' thinking on income rather than accumulation as saving for retirement falls more on the shoulders of individuals than corporations.

Department of Labor officials released an advance notice of proposed rulemaking in 2013 on the issue, but Ms. Borzi said the agency had “run out of time.” The DOL has been devoting many of its resources to its fiduciary investment advice regulation.

Congress, though, seems to be picking up the mantle.

A bill that unanimously passed the Senate Finance Committee in September contains a provision titled “disclosure regarding lifetime income,” which, as drafted, would require annual benefit statements to include such income disclosures once per year.

The legislation, called The Retirement Enhancement and Savings Act, also calls on Labor Department officials to develop a model lifetime income disclosure and prescribe the assumptions — rate of return and mortality, for instance — plan administrators could use when converting account balances into lifetime income streams.

The assumptions may be in the form of a single set of assumptions or a range of permissible assumptions.

“While the DOL was actively working on their regulation, there was really no need for legislation [on lifetime income illustrations],” according to Michael Hadley, partner at Davis & Harman. “But now that the Labor Department has sort of put it aside and it's unclear what the next administration's priorities will be, suddenly the reason to have legislation has come back.”

Such a provision fits with other actions the Obama administration has taken to promote an income focus in 401(k) plans.

In 2014, the Treasury Department issued rules promoting use of longevity annuities (specifically, qualified longevity annuity contracts) in IRAs and 401(k)s, as well as separate guidance allowing deferred annuities to be bundled into target-date funds.

“There have been a lot of subtle efforts to get people to increase their longevity insurance in some way,” according to Aron Szapiro, director of policy research at Morningstar Inc. “The QLACs are probably the most explicit form of that.”

The Thrift Savings Plan for federal employees, the largest defined contribution plan in the country, adopted lifetime income disclosures on participant statements a few years ago.

There are pros and cons to such disclosures, analysts say.

Will Hansen, senior vice president of retirement policy at the ERISA Industry Committee, which represents large employers, says the income disclosures would create confusion for participants, who are often not exposed to annuities (and, therefore, the concept of annuitization) in their 401(k) plans.

He also believes cost would increase for employers due to the extra time human-resources departments would need to answer questions and amend plan statements, and may increase for participants as well if that cost is passed down.

However, participants may benefit from a behavioral standpoint, if the conversion of account values to an income stream displays a smaller sum than previously envisioned, according to Mr. Szapiro. Consequently, participants may increase savings rates, he said.

There are questions that would need to be addressed, Mr. Szapiro said, such as: How frequently would assumptions vary? How would statements convey that this is a hypothetical annuity participants may not be able to buy inside their 401(k)?

The bill, which also contains provisions for open multiple employer plans and a safe harbor for 401(k) annuities, has broad bipartisan appeal.

While there's a chance the bill could be attached to some sort of must-pass, year-end legislative package, analysts don't view that as likely. But its prospects for review during the next legislative session are strong, they say.

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