Dear Darl…(why more regulation is not always a bad thing)


“Keep the government out of my 401-k plan!”

That’s the text – in full – of one of the responses to the Department of Labor’s recent call for public comment on proposed regulations for retirement income illustrations in pension benefit statements. The respondent identified themselves simply as Darl from Arizona.

In total there were 115 responses to the call for public comment by the time the official deadline for submission passed on August 7th. Many of these were from individuals, others from industry bodies such as the Defined Contribution Institutional Investor Association or the American Council of Life Insurers and financial organizations such as Prudential, Fidelity, Milliman and so on. Russell’s response is here and the full list is available here. There are lots of points made in those responses we agree with and lots we don’t. But, in this blog, I want to concentrate on the point raised by Darl. Because even though government regulation is not always bad, the burden of proof should rest on those who want it, not on those who don’t ¹.

So: why do those of us who are advocating plan statements be required to disclose additional information believe this requirement will be an improvement to the 401(k) system? The specific additional information we’d like to see would be an estimate of the lifetime annuity that could be purchased with the existing or projected account balance.

The belief that better disclosure will lead to better outcomes is one of the foundations of the vision for what Don Ezra , Matt Smith and I grandly called “the reinvention of defined contribution” in our 2009 book The Retirement Plan Solution. It is foundational because the 401(k) system was not designed for the role it now finds itself playing: the role of being the primary vehicle for providing income to millions of Americans throughout their retirement. It stumbled into that role almost by accident: the purpose of early 401(k) plans was to allow flexible, tax-efficient deferral of bonuses for higher-paid employees.

A side-effect of that origin is while there’s been a lot of thinking about how best to build up the value of 401(k) accounts, there’s been very little attention paid to how those accounts should be converted into income streams after the account owner retires. A lot of retirees get an unpleasant surprise on discovering—too late—that $100,000 or $500,000 may be a lot of money, but it doesn’t necessarily generate the amount of income year-after-year-after-year they need to live the life they were hoping to lead. There’s no need for this to be a surprise.

As we wrote four years ago: “Income replacement in retirement for the many is a much tougher task than tax-efficient accumulation of wealth for the few” ². The proposed new disclosure requirements are intended to bring into the open the scale of that challenge, and to do so early enough in the process that something can be done about it. The proposed regulation is about clearer reporting, providing information that could make Darl’s retirement – and the retirement of millions of others – more secure, and that’s got to be a good thing.

¹ Obviously, without the government there would be no 401(k) to start with: the reason such plans exist is to take advantage of a tax break offered by section 401(k) of the IRS tax code. So the government’s in there, whether we like it or not. But that’s not really the point here, I think.

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. 16.


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