Individuals who participate in 401k plans, or particular 403b plans, should see something new on their following quarterly statement for the period ending on June 30, 2022. For the first time, your 401k statement must include annuity illustrations of the monthly payments you would receive if you used your 401k account balance to purchase an annuity. This new requirement is part of the SECURE Act passed by Congress in December 2019. Congress intended that employees see the illustrations and realize that their lump sum account balance may not produce high enough monthly income to last their lifetime. Sequentially, this should persuade workers to increase their retirement plan savings rate.
ERISA-Covered 401k and 403b Plans
The new requirement is for ERISA-covered 401k and 403b plans. ERISA covers most 401k plans. However, there are some notable exceptions. These exceptions include the Thrift Savings Plan and solo 401(k)s. Not-for-profit companies, such as hospitals, offer 403b plans covered by ERISA, as long as the company contributes to the plan. The new requirement must also show two kinds of annuities on the statement – a single-life annuity and a joint and survivor annuity.
Definitions
Thrift Savings Plan – for federal workers and the military
Single-Life Annuity – payments over your lifetime only
Joint and Survivor Annuity – payments over the joint life expectancy of you and a hypothetical spouse of the same age
The illustrations on each statement will use your account balance as of the statement date. If you’re under age 67, the examples assume annuity payments will start at age 67. If you’re over age 67, the illustration payments will begin immediately. Additionally, the illustrations do not suppose you will have any future contributions between your actual age and age 67. For that reason, if you’re much younger than age 67, the examples may seriously underestimate the annuity value of your 401k savings. Furthermore, the new illustrations will not take into account Social Security benefits.
The Labor Department requires that the narrative explaining the illustrations be “written in a manner calculated to be understood by the average plan participant.” The DOL has produced a model language that plans can use to satisfy this requirement. However, some critics of the new condition believe that the language remains complicated for an “average” employee to understand. Hopefully, those employees who read their account statements will not gloss over the new illustrations.
By Ian Berger, JD
IRA Analyst
