The Department of Labor has recently published its rule-making agenda for the 2012-2013 fiscal year. While several of the regulatory projects will impact retirement plans and their service providers, one proposed regulation is of particular importance to the retirement income community. That is, the DOL is working on guidance that could require ERISA-governed defined contribution plans to provide retirement income projections to participants. More specifically, the DOL said in its agenda:
Individual account plans that permit participant direction must provide the [pension benefit] statement quarterly and individual account plans that do not permit participant direction must provide the statement annually. As part of this initiative, the Department will explore whether, and how, an individual benefit statement should and could present a participant’s accrued benefits in a defined contribution plan (i.e., the individual’s account balance) as a lifetime income stream of payments in addition to presenting the benefits as an account balance.
We believe that, if the DOL develops and issues a proposed regulation in this area, it will have a significant impact on ERISA-governed, participant-directed plans. That is primarily because it will change the focus of 401(k) and 403(b) plans from account balances to retirement income. In other words, we believe that the effect will be to focus participants and plan sponsors on the fact that account balances will ultimately be used to provide retirement income. That income may come from the plan or it may come from a rollover IRA, but it will be withdrawn on a periodic basis to support the retiree.
We believe that change of perspective would be a significant improvement in terms of focusing participants initially on the need to view retirement accumulations as income vehicles and, ultimately, on the need for secure lifetime income in retirement.
If the DOL ultimately mandates retirement income projections, it is likely that private sector service providers (for example, recordkeepers and advisers) would provide retirement income adequacy benchmarks (e.g., 80 percent of final pay including Social Security retirement income), and would provide gap analysis to assist participants in determining the increases in deferrals, if any, that are needed to obtain the objective of retirement income adequacy. This is an issue that insurance companies, investment managers, plan sponsors and service providers should follow closely.