As we move from a DB world in which participants are guaranteed a lifetime benefit to a DC world in which each of us must figure out how much we need to save to maintain a certain stream of income, the DOL’s EBSA has come out with an advanced notice of proposed rule making (ANPRM) that would require DC participant statements to convert account balances into a stream of monthly income.
The idea makes sense, but the devil is always in the details — beginning with the question of whether the calculation should be based on a participant’s current account balance or a projected balance. In turn, this raises a whole host of questions about how to make that projection.
The ANPRM tries to answer many of those questions, even supplying a calculator that makes certain assumptions, including these:
• 3% annual increase in deferral rates
• 7% rate of return
• Inflation adjustment at a 3% rate
Addressing how providers make their own calculations, the ANPRM states:
"The general rule being considered by the Department is that “projections shall be based on reasonable assumptions taking into account generally accepted investment theories.”… By contrast, the safe harbor being considered by the Department is narrower and more prescriptive than the general rule under consideration."
Once a projected account balance is calculated, the next question is about how to convert that into a stream of income — that is, via a draw down method or annuitization. Favoring the latter, EBSA also addresses in-plan annuities.
The notice is slated for publication in the Federal Register today. Once that happens, comments on the proposal may be submitted within a 60-day window.
Issues facing the industry if the proposed rule is implemented include increased work and costs, required disclosure of assumptions, the reasonableness of assumptions if the safe harbor is not followed and potential litigation from participants if the projected stream of income is not realized, since some participants are likely to assume it is a promise or guarantee. The devil, as noted in this post, really is in the details.
