Bill would require showing savers' 401(k) balance as a fixed monthly annuity payment
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The total balance on a 401(k) statement is generally viewed as the most important number. But, as important as that is, it does not give employees a full picture of where they stand in their retirement planning.
A bill under consideration in Congress would require plan sponsors to include another number on 401(k) statements that could be even more critical in helping workers understand how their savings will last through retirement -- the annuity equivalent.
An annuity equivalent number is the guaranteed lifetime monthly income that an insurance company would pay the employee and the employee's spouse if the entire 401(k) balance were used to purchase a life annuity at the age of 65.
"Half of American households will lack sufficient retirement income to maintain their pre-retirement standard of living, but many are unaware of their vulnerability," said Sen. Jeff Bingaman, a Democrat from New Mexico and a co-sponsor of the bill. "Our bill will empower Americans to determine whether they are on a path to a secure retirement."
The Lifetime Income Disclosure Act would be a small step in helping retirement savers look at their 401(k) balances in terms of the monthly income it could potentially generate through a fixed annuity.
In the same way that Congress mandated annual Social Security statements in 1989, the monthly annuity equivalent would help workers see how much income they can expect to receive to meet monthly expenses during retirement.
The bipartisan bill, which is co-sponsored by Sen. Bingaman; Sen. Johnny Isakson, R-Ga.; and Sen. Herb Kohl, D-Wis., is still in its early stages in the Senate health, education, labor and pension committee. The next step will be a full committee vote later this year. The bill will then be eligible for consideration by the full Senate.
So far, the act is supported by many of the leading voices on retirement policy, including the AARP, the National Women's Chamber of Commerce and the American Society of Pension Professionals and Actuaries, the nation's leading association of retirement plan professionals.
"In general, New York Life thinks it's a good thing," said Paul Horrocks, vice president of the New York-based insurer. "But we feel very strongly the annuity number should be standardized.
First Published May 17, 2011 12:00 am
