Key Data Missing from your 401(k) Statement

No strangers to taking their lumps, 401(k) investors are now worrying about the real value of their lump sums.

It's beginning to dawn on 401(k) participants, especially the Baby Boomers nearing retirement, that they haven't a clue how much sustainable monthly income their 401(k) lump sum can generate. In a recent ING survey, 84 percent of 401(k) participants said they want their employers to include a line-item on their 401(k) statements that would show how much monthly income they could expect in retirement based on their current lump sum 401(k) balance. This is indeed the key data point missing from every 401(k), and it's an omission no one can afford. If you don't have a clear idea of how much you can afford to pull out of your 401(k) lump sum without running it dry too fast, how do you know if you can even afford to retire in the first place?

The Decumulation Challenge
For the past 30 years the big push in 401(k)-dom has been on getting employees to save, save more, and save smarter. Now there needs to be an equal effort to help 401(k) participants spend down those savings at a sustainable pace. It's not exactly something that is easy or obvious to figure out on your own, and it's clear education is needed.

In the recent Wells Fargo Retirement Fitness Survey, the average expected withdrawal rate among pre-retirees was above 9 percent. Among women it was more than 10 percent. At that withdrawal pace you will likely have run through your account in less than a decade. Keep in mind that on average, 50 percent of today's 65-year-olds will still be alive into their mid 80s, and a significant portion will live on into their 90s. Unless you're planning on a short retirement or a big inheritance or windfall, a 10 percent withdrawal rate that is likely to run out in a decade or so is a ticket to retirement insecurity.

Washington Aware of Problem

This is one area where Washington is actually trying to ward off the train wreck before it occurs. Through the Treasury Department and the Department of Labor, the Obama Administration has asked for feedback on the utility of making immediate annuities a standard part of 401(k) plans. There are many possibilities floating around-and this idea is barely out of the first inning-but the basic idea is to give 401(k) participants an easy way to convert at least a portion of their 401(k) lump sums into a steady income stream at retirement.

(Before any Tea Party blood starts to boil let's be clear that no current idea being put forth would mandate participants must invest in annuities. All that is being proposed is the utility of offering immediate annuities as an option. A choice. If you want one, it would be available, if you don't, then just opt out. Democracy will not be threatened.)

Interestingly, while the ING survey makes it clear 401(k) participants want help understanding what their lump sums will be worth to them in retirement, that so far has not created any enthusiasm for annuities. In the latest Retirement Confidence Survey from the Employee Benefit Research Institute, annuities were not exactly a popular consideration.

That response isn't too surprising. And it's actually pretty smart. Given the lousy (read: expensive, overpromising) structure of many types of variable annuities, it's easy to see how any mention of the word "annuity" wouldn't trigger a positive response. But immediate fixed annuities are a different animal that could make a lot of sense for many retirees who are worried about making their money last. So part of the challenge is education on how immediate annuities work, and how to shop smart for the best immediate annuities.
A Solid First Step is Idling in the Senate
Last December, a bipartisan group of Senators introduced the Lifetime Income Disclosure Act that would do just what the 84 percent of Americans say they want: include a breakdown on your 401(k) statement that would show what the income stream would be in retirement based on your current lump sum. So far it has gone nowhere.
Related Articles on MoneyWatch:

Good and Bad Reasons to Pass up an Immediate Annuity
Five Rules for Immediate Annuities

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