If you have a defined benefit pension or a traditional plan provided by your employer, federal law says you have to be provided with an illustration of how much money you can expect to receive each month.
But if you have money invested in a 401(k), the only thing you may see is a lump sum amount and little if any direction on how that money translates into a monthly payment.
Let’s say you have saved $125,000 in your 401(k) for retirement. That’s a lot of money, but how does that translate into a monthly payment?
To help answer that question, the Department of Labor’s Employee Benefits Security Administration is considering rules that would require estimated income illustrations for workers participating in defined contribution pension plans such as 401(k)s and 403(b)s. Simply put, you would get a snapshot of how your savings in these plans translate into a monthly dollar amount.
According to the Labor Department, there are almost 660,000 private-sector employer-sponsored defined contribution plans covered by the Employee Retirement Income Security Act or ERISA. The bulk of the plans are ones in which workers are responsible for directing the investment of their own retirement assets.
By breaking down retirement money as level monthly payments for an expected lifetime, said Phyllis C. Borzi, assistant labor secretary for employee benefits security, it might make many people realize they don’t have enough saved.
This is your chance to help the government come up with an illustration that makes sense to you. The Labor Department is seeking input from workers, employers, and others in developing these possible regulations.
For now, the idea being kicked around is to have your statement project estimated payments, one based on your current plan balance and a second that would consider various assumptions:
■ You would continue making contributions until you retire at 65, increasing the amount 3 percent a year.
■ A return of 7 percent per year (about 4 percent real return and 3 percent future inflation), an assumption based on historical market returns, the department said.
■ A discount rate of 3 percent per year, in order to show the projected account balance in today’s dollars. The department said it is using the 3 percent figure because it reflects historical inflation and expectations for future inflation.
Let’s say you are 50 and 15 years away from retiring. Your account has $125,000. Based on your current balance, your statement would indicate a monthly payout of $625, until of course the money runs out.
If your projected account grew to $358,667 your estimated stream of monthly payments would be $1,793. For married participants, the statement would include joint and survivor payments.
It should be noted that the projections aren’t promises of a guaranteed payout. And the illustrations aren’t based on purchasing an annuity.
You don’t have to wait for any rules, however. The Labor Department has a calculator that will help you do your own projections now. Go to www.dol.gov/ebsa/ and search for “Lifetime Income Calculator.”
Certainly people can use the calculator themselves, but I like the in-your-face option of putting the information on statements. Maybe seeing what the lump sum will look like broken down into monthly payments — and for many it will be a smaller figure than they thought — will encourage people to sock more into their 401(k)s or make them think twice about withdrawing money before retiring.
But weigh in for yourself. You can send your comments to the attention of the “Pension Benefits Statement Project” at the US Department of Labor, Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, 200 Constitution Ave. NW, Washington, D.C., 20210. You can also submit comments by e-mail to e-ORI@dol.gov with RIN 1210-AB20 in the subject line. Comments are due by July 8.