Income Projections: Showing Participants a Better Way

According to Assistant Secretary of Labor Phyllis Borzi, with the DOL’s Employee Benefit Security Administration (EBSA), research shows if defined contribution (DC) plan participants are offered cash, they will take it. She told attendees at the Plan Sponsor Council of America’s (PSCA’s) 66th Annual Conference that the agency wants to show participants they have a choice to create a lifetime income stream in retirement.

Borzi explained that regulators do an advanced notice of proposed rulemaking (see “DOL Extends Lifetime Income Comment Period”) when they think there is a problem and are not sure a regulation will be a solution. She said the agency wanted to know from commenters if there is a problem with participants understanding the option of creating a lifetime income stream and what the solution would be.

From the 120 comments received, the EBSA learned three lessons, according to Borzi:

• The DOL needs to be clearer about what constitutes investment education versus advice;
• There is a need to educate people about the importance of lifetime income; and
• Plan sponsors are troubled by potential fiduciary liability from including income projections on participant statements, especially if participants interpret it as a guarantee.

“We heard loud and clear that we need to clarify sponsors fiduciary responsibility when including lifetime income on statements,” Borzi said.

She added that many commenters were concerned about the DOL making the inclusion of lifetime income projections mandatory for plan sponsors. “It is currently voluntary, so I don’t understand how leaving it that way will change things,” Borzi stated. Commenters said if it is required, there must be clear parameters, but some worried this would stifle innovation (see “Industry Leaders to DOL: Don’t Stifle Innovation”).

Borzi said the most disagreement among commenters was about what to show—how participants’ balances translate to monthly income in current dollars or projected dollars (see “Lifetime Income Commenters Concerned About Online Calculators, Safe Harbor”). However, there was near unanimous agreement that lifetime income illustrations are a good way to educate participants.