Retirement income reporting: Signs of progress


On Tuesday (May 7th), at our institutional Summit conference in Savannah, Ga., I made the observation “you don’t want to set up a targeted objective specific to your particular goals and then measure something else in order to see how you are doing.”¹ That same day, 574 miles away in Washington, D.C., the Department of Labor put this sentiment into action and announced its long-anticipated plans for reporting lifetime income illustrations in defined contribution pension plans. There’s a two month consultation period around these proposals. However, since Russell’s views on this issue have been well-documented in the past, I don’t think I’m tipping our hand by sharing my initial reaction here, in advance of our comments that will be made through the formal channels.

First of all—and this is at odds with my usual gut reaction when new regulations are proposed—these changes are necessary. We have been saying for a number of years since the goal of most defined contribution plans is to provide financial security throughout a retiree’s lifetime, then the way in which account balances are reported needs to reflect that goal. This has been coming ever since the 401(k) plan started to evolve from a supplementary savings plan into the primary retirement vehicle for a huge section of the private sector workforce. In 2009, Don Ezra, Matt Smith and I noted that was a “growing realization that income has become the name of the game for DC plans, too. Reporting is going to be affected.”²

The DOL and the Treasury held joint hearings on this question in 2010, and in our response we noted this conversion from an account balance to a lifetime income number should be made on a standardized basis, using as simple an approach as possible. These principles appear to be embedded in the DOL’s proposed methodology. Over the next few weeks, our DC team will be going through the proposals with a fine-tooth comb to look also at the details of what is proposed, questions like: How appropriate is the proposed discount rate? And how good an approximation to commercially-available annuity rates is achieved? Although these details need to be worked through, the move toward simple, standardized retirement income reporting should be welcomed by participants and plan sponsors alike.

The second big issue here is how to differentiate between reporting of what has already been accrued and a projection of what may come to pass once future investment returns and future contributions to the plan are taken into account. Projection takes us out of the realm of reporting and into the realm of planning. It introduces a huge amount of uncertainty into the forecasts: it’s a basic principle of good accounting that future expected gains are not booked into today’s accounts. So we need to be careful when we move our eyes down from the first line of the proposed calculator output  (“current account balance”) to the second (“projected account balance”). And we will need to use an even-finer-toothed comb when we look at the assumptions underlying that output.

There’ll be a lot more said on this subject over the next couple months and beyond. (And I do hope we’ll end up with numbers that are reported as annual income figures, not monthly: when did your boss ever tell you that you were getting a pay raise to such-and-such an amount a month?). But this proposal represents a key step toward the reinvention of the DC system we’ve long been calling for.


¹ Bob Collie. Presentation to Russell Summit, May 7, 2013.

² Ezra, D. Don, Bob Collie and Matthew X. Smith (2009). The Retirement Plan Solution: The Reinvention of Defined Contribution. John Wiley and Sons. p. 15.


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