If you have a defined benefit pension or a traditional plan provided by your employer, federal law says you must be given an illustration of how much money you can expect to receive each month.
But if you have money invested in a 401(k), the only thing you may see is a lump sum amount and little if any direction on how that money translates into a monthly payment.
Let’s say you’ve saved $125,000 in your 401(k) for retirement. That’s a lot of money, but how much will you receive each month?
To help answer that question, the Labor Department’s Employee Benefits Security Administration (EBSA) is considering rules that would require estimated income illustrations for workers participating in defined contribution pension plans such as 401(k)s and 403(b)s. Simply put, you’d get a snapshot of how your savings in these plans would work out to a monthly dollar amount.
According to the Labor Department, almost 660,000 private-sector employer-sponsored defined contribution plans are covered by the Employee Retirement Income Security Act (ERISA). The bulk of the plans, 500,000, are ones in which workers are responsible for directing the investment of their retirement assets.
Breaking down retirement money as level monthly payments for an expected lifetime, said Phyllis C. Borzi, assistant labor secretary for employee benefits security, might make many people realize they haven’t saved enough.
This is your chance to help the government come up with an illustration that makes sense to you. The Labor Department is seeking input from workers, employers and others in developing these possible regulations.
For now, the idea being kicked around is to have your statement show estimated payments, one based on your current plan balance and a second that would consider various assumptions:
●You would continue making contributions until you retire at age 65, increasing the amount at a rate of 3 percent a year.
● A return of 7 percent per year (about 4 percent real return and 3 percent future inflation), an assumption based on historical market returns derived by participants in 401(k) plans, the department said.
● A discount rate of 3 percent per year, to show the projected account balance in today’s dollars. The department said it is using the 3 percent figure because it reflects both historical inflation and expectations for future inflation.
Let’s say you’re 50 and 15 years away from retiring. Your account has $125,000. Based on your that balance, your statement would indicate a monthly payout of $625, until the money runs out.
If your projected account grew to $358,667 — based on the assumptions used — your estimated stream of monthly payments would be $1,793. For married participants, the statement would include joint and survivor lifetime income payments.
It should be noted that the projections aren’t promises of a guaranteed payout. “We’ve already heard from people concerned about the liability,” Borzi said.
And the illustrations aren’t based on purchasing an annuity.
“We tried to make it product neutral,” she added.
You don’t have to wait for any rules, however. The Labor Department has a calculator that will help you do your own projections now. Go to www.dol.gov/ebsa/ and search for “Lifetime Income Calculator.”
Certainly people can use the calculator, but I like the in-your-face option of having the information on statements (if only more people would open their statements). Maybe seeing what the lump sum will look like when broken down into monthly payments — and for many it will be a smaller amount than they anticipate — will encourage people to sock more into their 401(k)s or make them think twice about withdrawing the money before they retire, which includes a penalty.
But weigh in for yourself. You can send your comments to the attention of the “Pension Benefits Statement Project” at the U.S. Department of Labor, Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, 200 Constitution Ave. NW, Washington, D.C. 20210. You can also submit comments by e-mail to e-ORI@dol.gov with RIN 1210-AB20 in the subject line. Comments are due by July 8.
Readers may write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or email@example.com. Personal responses may not be possible, and comments or questions may be used in a future column, with the writer’s name, unless otherwise requested. To read previous Color of Money columns, go to postbusiness.com.