The Labor Department's regulatory project to illustrate how a defined-contribution participant's account would translate into a lifetime income stream has stalled, according to one of the department's top officials.
“To be very honest, we are sort of at a crossroads with that project,” said Phyllis Borzi, assistant secretary of labor of the Employee Benefits Security Administration (EBSA).
The Department of Labor
published an advanced notice of proposed rulemaking (ANPRM) in 2013 signaling its wish to issue rules governing depiction of the income stream a plan participant's DC account balance would generate in retirement. The illustration would appear on participants' periodic account statements.
The project fits in with the broader push the Obama administration has made recently to encourage thinking about 401(k) plans in a more pension-like context. In 2014, the Treasury Department issued guidance
approving use of 401(k) assets to purchase qualified longevity annuity contracts (QLACs); that same year, Treasury also issued guidance
encouraging the bundling of deferred income annuities into target date funds.
“Giving people that information causes behavior to change in a positive fashion,” Ms. Borzi said. “When people see how much they've contributed, how much they've accumulated, and in some cases how little it will give them as a lifetime income stream, they do bump up their contributions.”
However, the question of how to structure income illustrations has been a sticking point, according to Ms. Borzi, who spoke Tuesday afternoon at the Defined Contribution Institutional Investment Association's 7th annual public policy forum in Washington, D.C.
The Labor Department received fairly split guidance from the private sector during a public comment period, Ms. Borzi said. Some thought a “snapshot” of an account balance and the current income stream it generates would be most appropriate; however, a fairly equal number thought that number would be meaningless, and some assumptions would be needed in the projection (for example, if someone worked to normal retirement age, was employed by the same company, and contributed at the same rate throughout their working career, what would the estimated income stream be at retirement?).
“We have these two very, very different approaches, and there wasn't any consensus as to which way to go,” Ms. Borzi said.
Following through on a regulatory project and ultimately letting stakeholders decide how to structure the illustrations wouldn't make sense either, because that's current law, she said.
The rulemaking has also stalled in part because the DOL is seeking more data, especially from consultants and financial services organizations, to make the case that a change is needed, Ms. Borzi said.
“That's really what's holding us up,” she added.
According to a
study published last year by the Insured Retirement Institute, nine in 10 retirement plan participants said they wanted income estimates on their 401(k) statements.
However, some question if the projections would do much to improve overall retirement savings.
While disclosure is important and necessary, it's not enough to have a meaningful impact, according to Philip Chao, a benefits and investments consultant at Chao & Co., an independent registered investment advisory firm that manages more than $1 billion in 401(k) assets.
“That alone won't do the trick,” Mr. Chao said.
