Legislation introduced by three U.S. senators last week would require 401(k) plan sponsors to inform participating workers of their projected monthly retirement income based on their current account balance. The measure aims to improve workers’ understanding of their retirement plans and how they can strengthen their preparedness.
U.S. Senators Jeff Bingaman, D-N.M., Johnny Isakson, R-Ga., and Herb Kohl, D-Wis., have proposed the Lifetime Income Disclosure Act, which would require 401(k) plan sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current account balance. The measure is similar to the Social Security Administration’s annual statements, which are mailed annually to workers, informing them of estimated monthly benefits based on their current earnings.
“It is estimated that half of American households will lack sufficient retirement income to maintain their pre-retirement standard of living. 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,” said Bingaman, a long-time Senate leader on retirement issues.
Specifically, under the Act, defined contribution plans subject to ERISA – including 401(k) plans – would be required annually to inform participants of how the account balance would translate into guaranteed monthly payments – a “retirement paycheck for life” – based on age at retirement and other factors.
To ensure there is no material burden or potential liability on employers who voluntarily sponsor 401 (k) plans, the legislation directs the Department of Labor issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure, according to a press release. Employers and service providers using the model disclosure and following the prescribed assumptions and DOL rules would be insulated from liability.
“In our 401(k) system, it is not enough that participants make the choice 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. This bill will help millions of Americans make the best choices for a secure retirement,” said Kohl, Chairman of the Special Committee on Aging.