Americans with 401 (k) plans may think they have saved a lot for retirement, but a new government rule will show them exactly how much money they will see in their old age.
The Department of Labor has published its interim final rule whereby managers have plans for defined contributions, such as 401 (k) plans, to show how their account balance translates into income for life. This change shows an individual’s full account balance as monthly income at retirement age.
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The goal: to allow workers to see what their savings amount to in real payments so they can measure if that money will be enough to live off retirement.
“The employee benefits from security management [EBSA] believes that illustrating a participant’s account balance as a stream of rough living payments, in accordance with the interim final rule, will help employees plan a contribution for a contribution to better understand how their account balance translates into monthly income from retirement and therefore better prepared for retirement, ”the DOL said in its announcement.
The rule was part of the Secure Act, sweeping pension legislation Congress passed in December. The law required administrations’ plans to include two illustrations of the account balance – one as a life annuity, meaning that payments would end in the participant’s death, and another as a qualified annuity for joint and survival, where payments for a couple would continue until the second partner dies.
To make these calculations, administrators will use assumptions such as when the annuity payment begins (for these statements, illustrations will act as if the payments began on the last day of the benefit period) and how old the participant will be at the beginning of the annuity (in this case age 67, which is the full retirement age for many people if they claim Social Security benefits).
The DOL said managers will use the 10-year constant maturity Treasury rate based on the first business day of last month’s statement period for their interest rate assumptions. It will also use the Gender Neutral Mortality Table of the Internal Revenue Code and to calculate the Qualified Joint and Survivor Annuity, will assume that participants have a couple of the same age (regardless of marital status).
For example, a 40-year-old single female participant with an account balance of $ 125,000 on Dec. 31. 2022 would receive $ 645 a month for her entire life, assuming she retired at 67 on that date, as $ 533 a month for the rest of her life, and then $ 533 until her partner dies.
Having account balances translated into monthly payments gives workers the opportunity to plan their retirement income more securely. Seeing hundreds of thousands of dollars can give a saver a false sense of hope that they can live comfortably in retirement, but having estimated figures that a person can compare to his or her current cost of living will give a more accurate picture of retirement security. Individuals will be able to use these estimates to calculate their expected retirement budgets, and include other factors, such as Social Security, a retirement or part-time job in their old age.
However, this legislation does not help everyone. More than a third of private sector workers do not have access to an employer-sponsored retirement plan, according to Pew Charitable Trusts. While there is $ 5.6 trillion in investment in 401 (k) plans, the Investment Institute for Company Company, the average account balance for participants in their 40s with two to five years with their employers was $ 38,000. Participants in their 60s with more than 30 years on the job had an average balance of $ 287,000.
The DOL said that this rule will be effective one year after its publication in the Federal Registrar, and that it intends to issue a definitive rule by that date. The new law will cost about $ 201 million in its first year, and $ 6.6 million in the second year and $ 4.8 million in the third year, as development costs decrease and planning managers become more experienced in it. providing these illustrations.
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