Instead of leaving Americans to educate themselves about retirement planning and saving, legislation introduced in the Senate this week would mandate that 401(k) and other defined contribution plans show beneficiaries the projected value of their retirement accounts.
Just as the Social Security Administration issues annual benefit projections, the Lifetime Income Disclosure Act, introduced by Sens. Jeff Bingaman, D-N.M., Johnny Isakson, R-Ga., and Herb Kohl, D-Wis., would require retirement plan sponsors to supply data on how much income a participant's account balance would generate per month at retirement. This income projection would be based on age at retirement and other factors. In 1989 Congress mandated the annual Social Security statements, which have helped workers prepare for retirement.
"It is estimated that half of American households will lack sufficient retirement income to maintain their preretirement standard of living," said Bingaman, a senior member of the Health, Education, Labor and Pensions Committee, which has jurisdiction over 401(k) plan disclosures. "Yet many Americans are unaware of their financial vulnerability. Our bill is a common-sense approach to empowering Americans and helping them determine whether they are on a path to a secure retirement."
Kohl, the chairman of the Special Committee on Aging, said it is not enough that participants decide to save. "Then they have to decide how much to save, where to invest their savings and how to make the best use of it when they retire."
Many retirement plan participants may be surprised at how quickly their retirement savings can disappear. The reality is that a 401(k) account with $50,000 in it goes fast, according to Catherine Collinson, president of the Transamerica Center for Retirement Studies.
Despite the best efforts, year after year, of the retirement industry and the media, plan participants' knowledge does not seem to be growing. "Many people have been guessing how much their retirement income will be. For the vast majority of plan participants, it will be a big wake-up call," Collinson said.
The legislation directs the Department of Labor to issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure, so that employers who voluntarily sponsor 401(k) plans would incur no material burden or potential liability.
David Wray, the president of the Profit Sharing/401k Council of America, an association of 401(k) plan providers and profit-sharing plans, said that a government mandate would add responsibility for plan sponsors, as well as costs that they would then pass through to plan participants.
"Plan sponsors have to run their businesses," he said, "and if you make the process more complex, a lot of smaller companies that don't have plans won't want to sponsor them. We don't need another government mandate on plans. We like to let the marketplace provide the solution."
In addition, the Labor and Treasury departments are jointly requesting information from the retirement industry to determine whether regulation of the retirement plan market is needed. Until this broader issue is addressed, Wray said, it is premature to act on the legislation mandating income disclosure.