Your next 401(k) statement may look like a scary Halloween prank, but don’t spit out your pumpkin spice latte just yet.
Changes are expected to Americans’ retirement plan statements thanks to federal legislation, and one act in particular — the 2019 SECURE Act — will require 401(k) savings to be presented as a monthly income stream in addition to the usual lump sum.
Investors in 401(k)s, a retirement savings and investment plan offered through employers, traditionally receive statements after each financial quarter showing information like overall savings, investment allocations, risk analysis and progress toward retirement savings goals. But lawmakers want to rewire how Americans think about those savings by breaking down the numbers to show what their financial situation could look like month-to-month based on their current 401(k) balance.
What the SECURE Act income illustrations will look like
The SECURE Act became law in 2020 following near-unanimous bipartisan approval in Congress. It added two U.S. Department of Labor requirements regarding lifetime income illustrations in 401(k) statements issued by your plan administrator, or the person responsible for the day-to-day management of your retirement account.
Most 401(k) investors should see the changes on their statements for the first time in the coming weeks — the third quarter ends on Sept. 30, and statements are mailed out within 45 days of the end of each quarter.
Until now, only the amount you’ve accumulated in your 401(k) appeared in quarterly statements. The SECURE Act now requires plan administrators to provide an additional illustration that estimates a worker’s monthly income if they purchase an annuity with their 401(k) funds at age 67.
Statements will show two estimates based on your retirement savings account balance. The first is a single life annuity, which covers you alone for the rest of your life beyond 67. The other is a qualified joint and survivor annuity, which provides income for you and a surviving spouse upon your death.
The income projections use the specific Treasury rate that approximates the one used by the insurance industry to price immediate annuities.
What does that mean? Nothing is changing with your retirement savings — only the way your balance could play out in retirement, which is now projected as a monthly amount. You shouldn’t worry too much if your statement says your nest egg will translate into a piddling monthly income.
The DOL’s example shows that Participant X, who is 40 and single, has accumulated $125,000 for the quarter ending Dec. 31, 2022. If Participant X stays single, that amount would mean a monthly income of just $645 a month with a single life annuity. If Participant X marries and buys a qualified joint annuity, that’ll mean $533 a month.
But that estimate is only what Participant X has saved up so far, and it’s just one part of the picture: A 401(k) is one account in an overall retirement savings strategy and doesn’t include other investments, savings or Social Security.
“While the lifetime income illustrations under the DOL’s regulations are far from perfect, they do press the issue of helping participants understand how their retirement plan balances translate into monthly retirement income,” John Carl, founder and president of the Retirement Learning Center, wrote in an April column for the National Association of Plan Advisors.
So don’t look at your statement as a guarantee of poverty in your retirement years if you’ve still got years of work ahead of you and have a diversified retirement portfolio. Instead, think of the new requirement as a way to keep yourself on track or to correct your course if you’re saving too much or too little.
