(The Center Square) – Workers across Illinois with certain retirement accounts soon will see a new number on upcoming quarterly statements.
Participants in defined-contribution plans, like 401(k) or 403(b) accounts, will receive a projection of what their account balances will provide in monthly retirement income. Currently, most statements only provide an up-to-date lump-sum amount.
“The premise here is that the now-ubiquitous defined contribution plans ought to be made with a similar format of disclosure to Social Security or defined-benefit plans,” said Professor Richard Kaplan, Guy Raymond Jones Chair in Law at the University of Illinois. “Rather than telling people how much you’ve accumulated, tell them what you can expect to get in terms of monthly income. To make it easier to sort of add them up and see what the whole picture looks like.”
The change comes via the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was enacted in December 2019. Regulations implementing this provision became effective as of the second quarter of 2022.
“This could be a wake-up call,” Kaplan said. “‘Dude, or dudette, you need to start putting more in.’ That is, either save more in the 401(k), a higher percentage of your salary, or put it into different forms of investments. It would provide some sort of mid-course correction.”
Kaplan argues many workers don’t consult a financial planner when investing in their retirement plans and might need a jolt of reality.
“They’re walking around largely in the dark,” Kaplan said. “They [projections] are not going to be guarantees. There won’t be promises. And they’re certainly subject to a lot of variation. It’s more of a matter that they should realize that what looks like a fairly substantial amount may not turn out to be as much income as they would expect.”
He said the projections aren’t perfect, as they assume a retirement age of 67, the full retirement age under the Social Security program for workers born after 1959. However, a vast majority of Americans begin taking retirement benefits before that time.
“There’s no doubt that a range of two or three different ages would’ve been more informative, but there’s a countervailing consideration of overwhelming people with too many numbers,” Kaplan said.
He also thinks the statements should provide more context for the projected income amount.
“There’s no mention in any of this that these income projections are going to be taxable and in almost every possible circumstance, the entire distribution is going to be subject to income tax,” Kaplan said. “It should have been flagged all over the place.”