Ordinary folk often can’t do the easiest things, or grasp the simplest of everyday notions.
Don’t wince – I’m talking about me.
I can’t swim, despite lessons and a natural buoyancy afforded by the extraordinary surface area of my corporeal form. People tell me I have a beautiful singing voice; shame I can’t hit a note. And while I lived in Russia for 16 years, just now, I can’t remember their word for ‘frostbite’.
The hapless opinionated, wishing to sound wise, like to cite the Founding Fathers of America. Here’s a notion of John Adams I’ve quoted before, yet I don’t think his words have worn out their welcome:
“All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation.”
In 18th century America, retirement planning wasn’t a thing – beyond building a stout cabin, putting up elk meat and birthing innumerable children to get in the crops – but if Jefferson or Madison had found time to invent it, Adams would certainly have appended those words to his “downright ignorance” list.
In my experience, people understand coin well enough – it’s for tolls and parking meters – but they don’t get investing. Many moons ago, Jess – I mentioned him recently: an old friend who delighted in busting my whatzits – asked: “How can you work in finance?”
Why not? “The stock market is so immoral,” said J, that philosopher-moralist-nincompoop par excellence.
“Do you not have a retirement plan?” I queried. “Yes” – he declared, as if from a pulpit. “But not in the market – in a mutual fund.” He really said this; he has a PhD. Jess had a college savings plan for his two kids, too. I explained the matter, made it crystalline clear, and I haven’t heard from him since.
I had a near-exact talk with another companion, who – get this – owns her own travel agency. Jo’s in a mutual fund, too, but didn’t realize they ‘played’ in the markets. She thought they loaned money to start-ups and such. Oh, venture capital, I said – the riskiest form of investing, beyond space tourism and gun running. Jo’s still my friend, but only on Facebook.
Some things need to be carefully taught, explained and reexplained, graphically illustrated. That’s what the drafters of the SECURE Act of 2019 believed vis-à-vis retirement accounts. The Act’s founding principles go back to 1974, specifically to the Employee Retirement Income Security Act, which you might know as ERISA.
ERISA required that retirement plan administrators issue an annual account benefit statement, or go quarterly if the plan allowed customers to control their own investments. The law demanded only a simple accounting of the accumulated funds; that is, the lump sum accrued. A basic requirement, suited to the ‘70s – mellow old days of simple public service, if also horrible haircuts and lavender leisure suits.
In this chillier era, with everyday Americans failing to invest sufficiently, or at all, for retirement, lawmakers determined that plan providers must offer more graphical and practical disclosure to customers. And so were born the lifetime income illustrations.
The new disclosure will provide two illustrations: one showing the monthly income the current plan’s balance would pay if placed in a single life annuity (the key assumption built into the law’s calculations) and another, assuming the funds were invested in a qualified joint and survivor annuity, as a married couple might choose.
There are flaws in this method – the presentation is limited to what would happen if the plan participant retired today, which may look odd to a single woman in her 30s, say. But in the bright eyes of legislators, the intention is to teach retirement investors to think less of lump sums and more about monthly income. Academic studies suggest this approach works, so, in the least, it sounds solid and sane – a hopeful first step. There I go with the optimism again. Did the hangover ‘80s teach me nothing?
The deadline for providing these lifetime income illustrations to plan participants is looming: September 18, 2021. For participant-directed funds, like a 401(k), plan administrators must – well, the rule was written in Washington, so let’s simplify things: the first income illustration must be provided to customers no later than the second quarter of 2022 – recall, these types of accounts require quarterly reporting under ERISA. If a plan administrator is ready to comply earlier, great – but third quarter of 2022 is too late.
There’s been some confusion on this latter point, linked to the effective date of the new law (September 18, 2021) and the calendar date of the third quarter’s end (September 30, 2022). Not only commoners get confused by the details. So: plan providers, your well-and-true deadline is end-2Q 2022, and please recall, there’s no harm in serving it up early.
For non-participant plans (where the punter makes no investment decisions), the lifetime income illustrations must be included in the annual statement for calendar year 2021, in the year following the September 18 deadline. For reasons that our office experts tried mightily to explain to me, the functional deadline is October 15, 2022. It’s something to do with the participant’s taxes, so don’t let them down.
Law firms specializing in employee benefit plans are waiting to hear from plan administrators, who are laggard in preparing to comply with the rules. The new regime makes sense and the evidence suggests plan participants will respond with modest increases in retirement savings, at the least. They want not for honor or virtue; all they need is a nudge.
The retirement planning industry is aimed, after all, at assuaging perplexities, confusion and distress. You administrators, I imagine, are keen to comply. Don’t make jerks out of us, now, because if you miss this deadline, covering the ‘toll’ will cost more than your pocket change.