Sen. Isakson Files Lifetime Income Disclosure Act to Ease 401(k) Retirement Planning

For most Americans, pensions are a thing of the past and retirement saving beyond Social Security is all about defined-contribution plans like 401(k)s. As it stands, though, your 401(k) balance statement is only required to show your balance as a lump-sum amount. It can be tough to estimate what that number will mean when spread out over your retirement. Senator Johnny Isakson (R-GA) has joined forces with Senator Chris Murphy (D-CT) to fix that with the Lifetime Income Disclosure Act (S. 1317). This bill would require statements to include estimates of the monthly income your savings would provide after retirement, similar to Social Security statements and estimates on federal Thrift Savings Plan statements. Isakson explains:

“American workers need access to the best available information about their investment choices and exactly what they will yield upon retirement. This information not only helps them to plan, but promotes increased savings while they are still in the work force. Defined contribution plans such as 401(k)s are the retirement plans we count on in America, and this legislation will encourage participants to think of their 401(k) investments as a vehicle for lifetime income.”

Providing this estimated monthly income would increase the ease of planning for retirement. Putting one’s account balance into a more relatable number could also encourage individuals to save more, as they would know how their seemingly large lump-sum savings would spread out over their retirement.

A wide variety of the political spectrum agrees with this idea – this bill’s 2013 iteration counted Senators Elizabeth Warren (D-MA) and Tim Scott (R-SC) as co-sponsors. If passed, it would follow a trend of increased disclosures for defined-contribution accounts. Department of Labor action in recent years has led to increased fee transparency on 401(k)s, which is crucial for building a solid retirement nest egg. If you have a 401(k), you might want to head to your annual statements and check the fees on your investment options – a seemingly small fee difference could be costing you tens of thousands of dollars over your lifetime.

13 comments

  1. NorthGAGOP says:

    It is a very good idea. Why does it have to be federal legislation? If it’s that important to 401(k) holders why don’t they ask the plan providers to change their statements to include the information?

    • dsean says:

      Likely because it’d be a forward looking statement subject to SEC scrutiny and potential liability. So for the plan administrators, there’s a lot of risk and basically no upside.

    • DAinGA says:

      Because if we have learned anything, it’s that big banks and investment firms will not do something that helps the consumer but doesn’t benefit them without being ordered to do so.

    • Alex Rowell says:

      Dsean’s right – there’s a lot of assumptions that would go into this estimate, so providers would be reluctant to predict such. 401(k)s are regulated by DOL, not SEC, but same general concept applies. The legislation also calls for a conversion table from the DOL so that providers would be able to use a consistent formula with the same baseline assumptions.

  2. dsean says:

    I’m not sure this is such a good idea. There’s virtually no way to guarantee any future income within a diversified 401(k) with a long-term time horizon. So the proposal would give a lot of people either a false sense of security or fear about potential investment growth and income over a time horizon that could approach 50 years or more.

    I agree that more can be done to demystify retirement savings, minimum distributions, and general financial planning. But I’m not sure that this policy really furthers that goal in light of the general failure of personal economic education in this country.

    • DAinGA says:

      It is no more misleading than commercials for brokers or funds who tout their returns and have the “past performance is no guarantee of future results” said quickly. Or heck even the statements we already get which are only s snapshot of a moment in time.

    • Alex Rowell says:

      The time horizon is a major issue – and DOL has asked for comment on this before but hasn’t included it in disclosure regs. Also run into the issue that this is basically estimating what you would receive if you bought an annuity, and not all 401(k)s actually offer annuities.

      But the bill also leaves a solid amount of leeway for the DOL to figure out the assumptions used in the calculation. Since the federal TSP offers monthly estimates, building off that should be possible.

  3. saltycracker says:

    NO. The 1099 is adequate reporting.
    At the worst, govt could require is a hypothetical 70.5 RMD number based on the most recent 12/31 balance. Beyond that is misleading. But useful to democrats that think we need to means test SS derived from employee/employer contributions.

    • saltycracker says:

      Clarification: as for individual transparency this idea is too misleading and mandated numbers make it more misleading.

  4. saltycracker says:

    I would support the posting of anticipated public pensions when discussing salaries or maybe on voter info for those elected.

  5. objective says:

    of course, it’s difficult to predict, but the basic assumptions could be stated next to the predicted disbursement schedule in consumer-friendly language. estimates are better than ignorance.

  6. Dave Bearse says:

    This isn’t new. Many 401(k) plans already provide such estimates already.

    The assumptions are key—-future contributions, assumed rate of return to retirement, retirement age, assumed rate of return in retirement, longevity, and of course inflation in both contributions and in adjusting future monthly retirement income to current dollars.

    The assumptions used on one of my 401(k) statements are reasonable—contributions continue at current rate adjusted for inflation to retirement, reasonable rate of return (I don’t recollect what it was) until retirement at full social security age, reduction in rate of return at retirement *to I recollect to 4% or a little more), and longevity that seems to me to be a few years in excess of my actuarial (social security) longevity.

    The only other thing needed are calculations based on retiring a few years earlier than full social security age, and a few years after. Many people don’t appreciate the effect of early retirement on retirement income.

  7. seenbetrdayz says:

    If they really want to freak people out, they should put down estimates of how much the dollar will actually buy in the future when they’re ready to retire.

    “Congratulations, our estimate shows that your 401K retirement income per month, in the year 2050, will be about $5,000, which should be enough to pay your electric bill and buy half of a textbook for your grandson’s college education.”

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