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Read That Statement

Matt C. White

HAVE YOU HEARD that you shouldn’t check your 401(k) at times like this? Market volatility can wreak havoc not only with our account balances, but also with our decision-making. Ignoring our 401(k) statements might help us stick with our long-term investment plan.

True as that may be, there’s a good reason to peek at your second-quarter statement: to see if you can find a new feature—the lifetime income illustration. It was mandated by Congress as part of the 2019 SECURE Act, but it’s only now showing up on many 401(k) statements. Here are three points to help you make sense of the new feature:

Snapshot. These are the monthly payments that your 401(k) could potentially fund if you annuitized the balance as of the statement date—nothing more and nothing less.

Other factors can have greater sway over your eventual retirement income, such as future 401(k) contributions, market performance, inflation, how much longer you work and the assets you own outside the 401(k) plan. The estimate ignores all of this.

Annuity. Where do the estimated monthly payments come from? The lifetime income illustration assumes your 401(k) account balance is turned into an annuity—with the estimated income based on a uniform set of actuarial assumptions for ages, dates, life expectancy and interest rates that may or may not be true for your situation. The illustration assumes that you’re age 67 on the statement date, which is the simulated annuity start date or, if you’re older, your actual age is used in the calculation.

You’ll see both a single-life annuity and a qualified joint-and-survivor annuity modeled on your statement. The payments shown are not indexed for inflation. There would be no cost-of-living adjustment, so the monthly amount would lose spending power over time.

Mindset. Why did the SECURE Act mandate this new statement feature? Lawmakers and the retirement industry want 401(k) investors to change how they think about their retirement savings. They want us to think less about amassing a sum of money and more about how much income it might provide in retirement.

My advice: Take these estimates for what they’re worth. The lifetime income illustration is a peculiarly specific addition to 401(k) statements. It could be helpful if it jolts you into thinking about how much regular monthly income your savings might generate. But you wouldn’t want to limit your considerations to annuities alone.

It’s no surprise that the major players in the annuity industry supported the illustration’s introduction, as well as a new bill called the LIFE Act, which could lead to the use of annuities as a default investment in 401(k) plans. They’d get behind any legislation that could help them sell more product.

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OBX9397
OBX9397
2 months ago

Very interesting. Thank you for making us aware of this.

I will give Congress the benefit of the doubt and assume they had good intentions. However, it sounds like the results are too simplistic and may result in more harm than good. An illustration that did provide benefit would probably be too complex for many people to follow.

So, just for fun, what if companies required employees to attend a personal finance class at least once every year or two in order to receive their company match???

Or even better, require employees to read at least 20 articles a year on Humble Dollar.

My guess is that I will never be in Congress.

R Quinn
R Quinn
2 months ago

I understand the intent, but having administered 401k plans for many years I don’t see it as helpful, perhaps more confusing than anything else. A person could go to an annuity calculator and get a different and perhaps better result.

The sad fact is that the vast majority of workers pay little if any attention to benefit communications they receive.

Congress thought competition and cost sharing were the keys to controlling health care costs too 😩

Last edited 2 months ago by R Quinn
Matt White
Matt White
2 months ago
Reply to  R Quinn

Good points, Richard.

Rick Connor
Rick Connor
2 months ago

Matt, thanks for the great heads up. I’m sure many readers are unaware of this change and will be interested in checking out their statements.

Matt White
Matt White
2 months ago
Reply to  Rick Connor

Thank you, Rick!

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