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Projecting Retirement Income on Quarterly Participant Benefit Statements for Defined Contribution Plans

The Department of  Labor (DOL) has been thinking about either requiring or facilitating the projection of retirement income on quarterly participant benefit statements for defined contribution plans. The DOL’s next step will be the solicitation of  comments about the best way to do that. 

Three sample quarterly statements have been developed which will likely be released to the public for comment. The first, and simplest, sample statement provides only for the projection of  the current account balance to a participant’s retirement age.

In reviewing the sample statement, it provides little additional value to participants, since the projected account balance is so large (almost $700,000) that it would leave a participant with the sense of  great wealth ─ but with little idea of  the income that it would provide. 

The second sample statement includes both the projection of  the account balance to retirement and an estimate of  the amount of  monthly income (using joint and 50 percent survivor payments). The “great wealth” of  almost $700,000 is projected to yield about $2,500 per month ─ somewhere short of  living in luxury. 

The second sample is helpful. It gives participants a sense of  the monthly income that could be provided from their account using reasonable withdrawal rates. And, it reinforces the fact that the ultimate purpose of  the participant’s account is to provide retirement income. 

The third sample is essentially the same as the second, except that the projected numbers are rounded. We assume that the purpose of  the rounding is to emphasize to participants that these projections are estimates and should not be viewed as the actual amounts the participant will have at retirement. 

The samples describe the underlying assumptions, which are:

  • Gender-specific life expectancy assumption.

  • Retirement age of  67 (which is the normal retirement age for Social Security for most workers today).

  • Joint-and-survivorship annuity with level monthly payments, assuming the participant and his/her spouse are the same age and that the survivor benefits are equal to 50 percent of  the monthly payments to the retired participant.

  • An inflation rate of  3 percent.

  • An investment rate of  return of  7 percent. (Note that the effect of  a 3 percent inflation rate is to provide a “real” return of  4 percent. All of the numbers are based on present values.)

  • That the current employer and employee contribution rates grow 3 percent annually. 

Two additional thoughts:

  • The projection of  retirement income appears on the second page of  sample statements 2 and 3. This may run contrary to the purpose of  the projection. Participants want to know how they are doing and they want to know quickly and efficiently. Since projected income is a critical part of  the answer to that question, it would be most effective if  placed on the first page. 
  • The projections also include helpful information about the impact of  increasing deferrals. That information makes the statement lengthy, complex and perhaps confusing. 

However, it is needed information; the issue is how to streamline the presentation. When these materials are distributed to the benefits community, the burden will be on us to review them and provide the DOL with meaningful and helpful comments. If  properly done, this change could affect how participants evaluate their retirement savings, as well as their behavior, including important decisions about increasing deferrals, delaying retirement, and living standards.

©2017 Drinker Biddle & Reath LLP. All Rights Reserved


About this Author

Fred Reish, Partner, Drinker Biddle,  Employee Benefits & Executive Compensation

C. Frederick Reish is a partner in the firm's Employee Benefits & Executive Compensation Practice Group, Chair of the Financial Services ERISA Team and Chair of the Retirement Income Team.  His practice focuses on fiduciary issues, prohibited transactions, tax-qualification and DOL, SEC and FINRA examinations of retirement plans and IRA issues.

Fred's experience includes advising insurance companies and investment managers of the development of products and services that are consistent with ERISA's...

(310) 203-4047
Bruce L. Ashton, Employee Benefits, Attorney, Drinker Biddle, Law firm

Bruce L. Ashton is a partner in the firm's Employee Benefits & Executive Compensation Practice Group. With more than 35 years of practice, Bruce has gained wide experience representing businesses in sophisticated business transactions and employee benefits matters. Bruce's practice focuses on all aspects of employee benefits issues, including representing public and private sector plans and their sponsors, negotiating the resolution of plan qualification issues under IRS remedial correction programs, advising and defending fiduciaries on their obligations and liabilities, structuring qualified plans, non-qualified deferred compensation arrangements and health care arrangements, and representing plan service providers (including RIAs, independent record-keepers, third party administrators, broker-dealers and insurance companies) in fulfilling their obligations under ERISA. Combining his employee benefits and transactional expertise, Bruce is also active in the installation and funding of employee stock ownership plans (ESOPs).