401K News - October 2020

Starting next year, 401(k) participants will regularly receive information about the amount of income that their plan assets might deliver during retirement. The Department of Labor has announced an “interim final rule” that would require 401(k) administrators to show each participant’s account balance not only as a lump sum, but also as a projected monthly income stream. The rule implements Section 203 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted at the end of last year

The annuity calculations use gender-neutral mortality tables, so that male and female results are identical; the assumed retirement age for all participants is 67, beginning on the final day of the employee’s current statement; and both the single and joint results appear, regardless of the employee’s marital status. Obviously, this is an oversimplistic way of determining the monthly income stream with numerous drawbacks. For one, it makes numerous assumptions which may not be accurate. For example, when someone will retire, health issues, risk preferences, future interest rates, etc. Monthly income is derived from the interest rate on the constant-maturity 10-year Treasury note and the mortality table. Do you really want to base your future income on today’s rate of 0.72%? Do most people retire at age 67? Many retire at age 62 or younger so their monthly income from the estimate would be much lower than reported – at least 15% lower.

The positives of providing an estimate of future monthly income streams is that it helps workers plan for retirement and contribute more in retirement accounts. It also slows down employee use of retirement funds for other purposes. Often workers invade their retirement account as if it’s a piggy bank to use when they have a cash crunch because of excessive spending. Employees spend their alleged retirement assets when switching jobs, or by taking loans against their accounts that they don’t repay. A word to the wise, only use retirement funds for retirement if possible. Retirement is a costly endeavor. Moreover, your retirement could last long time well into your nineties. Some retirees run the risk of running out of retirement funds because they couldn’t save enough for retirement. Money taken from a retirement account rarely finds its way back into retirement accounts. It’s a slippery slope that often puts the worker in a situation where they really can’t afford to retire.

The ruling is trying to encourage 401(k) investors to annuitize their 401(k). Not everyone will wish to annuitize. Indeed, relatively few people buy immediate annuities today, in part because the decision is final, and the interest rate is near decade lows. Once those assets are spent on purchasing the annuity, they can never be retrieved – you lose control of your retirement assets. Let’s say you want some extra money from your 401(K) to repair a roof or buy a new car. In a 401(k) annuity you can’t make discretionary withdrawals. In an annuity you contracted with an Insurance company to receive a fixed number of lifetime payments. That’s it. Whereas if you transfer your 401(k) to an IRA Rollover, you could make as many discretionary withdrawals as you wish. Moreover, the payout from an annuity will be mostly your own money and very little from interest earnings. Today’s immediate annuity would be based on the 0.72% 10-year Treasury note.

The 401(k) participant would be better off considering a IRA Rollover transfer of his/her 401(k) to an IRA Rollover. An IRA Rollover allows the owner to invests retirement assets in stocks, bonds, CDs, commodities, gold, real estate, and money market funds. Your IRA Rollover asset allocation could very well provide greater monthly income. Annuities have their disadvantages, they carry higher costs, and do not yield more than many investment alternatives available in an IRA Rollover at Charles Schwab & Co. for example. Remember, all investments have risks. Speak to your Investment Advisor in order to make an informed decision that’s right for you and your circumstances. Make sure to speak with a Registered Investment Advisor (RIA) and not an Insurance salesman, Mutual Fund rep, or Stockbroker.

Thus, while the monthly income statement is instructive, and should encourage better investor behavior, it does run the danger of providing unreliable information or steering 401(k) investors into making the wrong decision. 401)K) owners should consider the advantages and disadvantages of rolling over their 401(k) to a Schwab IRA Rollover.