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Asset Preservation Capital, LTD
(248) 649-4759

By Ian Berger, JD
IRA Analyst

Those of you who participate in 401(k) plans or certain 403(b) plans should see something new on your next quarterly statement for the period ending June 30, 2022.

For the first time, the statements must include illustrations of the monthly payments you would receive if your current plan account balance was used to purchase an annuity. This new requirement is part of the SECURE Act passed by Congress in December 2019. Congress intended that employees will see the illustrations and realize that their lump sum account balance may not produce high enough monthly income to last their lifetime. This, in turn, will persuade workers to increase their retirement plan savings rate.

The illustrations are required for ERISA-covered 401(k) and 403(b) plans. Most 401(k) plans are covered by ERISA. Notable exceptions are the Thrift Savings Plan (for federal workers and the military) and solo 401(k)s. 403(b) plans offered by not-for-profit companies (such as hospitals) are also covered by ERISA if the company makes contributions to the plan.

The statement must show two kinds of annuity – a single life annuity (payments over your lifetime only) and a joint and survivor annuity (payments over the joint life expectancy of you and a hypothetical spouse with 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, it’s assumed payments will start right away. The illustrations do not assume that 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 401(k) savings. The new illustrations also 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 model language that plans can use to satisfy this requirement. Some critics of the new requirement believe that the model language is too complicated for an “average” employee to understand and even those employees who read their account statements will simply gloss over the new illustrations.