Contributor: Robert Richter
As we know, resources within defined contribution have been consumed with healthcare reform. As the dust settles, there will be a renewed focus on retirement plan issues, only one of which I address here – lifetime income options.
For many providers, just the thought of lifetime income options strikes a nerve. This is due to experience with pension plans where benefits must be offered as a joint and survivor annuity. Lengthy explanations are given to participants, who ultimately elect a lump-sum payment.
Many providers need to cast aside those preconceived notions about lifetime income products (most instantly think of annuities). The Department of Labor (DOL) is exploring a vast array of alternatives and issues. These range from participant education to the investment products that are (or may) be available. When it comes to investment products, there is concern about solvency, portability, fees, etc. Also, it may involve the purchase of investment products during the accumulation phase, as well as the decumulation phase of retirement planning. For example, a participant may be subject to adverse market timing (i.e., low interest rates) if a retiree were to purchase one lifetime income product today rather than over his or her working career.
From an educational perspective, what duty, if any, does the private retirement system have in educating participants about lifetime income investments (i.e., providing financial literacy)? One idea that is generating a significant level of interest is a requirement that defined contribution participant statements include an estimate of what a current account balance would provide as a lifetime income. It is an approach that is similar to the Social Security Statements provided. For example, an account would provide an estimated income of $X per year. Service providers may be able to accommodate this without too much difficulty provided the estimates are based on uniform data and actuarial assumptions that are not product or participant specific (other than possibly the age of the participant).
A major concern, however, with this approach is that the information might be misleading and/or useless to participants. Is it valuable for a participant to be provided with a statement that his or her account is worth $100,000 as a lump-sum and would provide an estimated $6,000 a year at age 65 until death? Perhaps it will encourage participants to save more if they are provided with a rough idea of how a lump sum equates to a lifetime income. Or, is this too speculative to be of any value since it does not factor in the costs of the investment product, the solvency of the provider, and the interest rates at the time the product is obtained?
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