Is More Disclosure Always Better?

Posted on January 5, 2010

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Back in December I wrote about a bill that was introduced in the Senate known as the Lifetime Income Disclosure Act. The bill would mandate plan sponsors to provide participants with projections of the monthly income they could expect at retirement from their current 401(k) balance.

Sounds like a pretty good idea. According to a recent article in the Chicago Tribune, the bill is backed by groups including AARP, the Women’s Institute for a Secure Retirement and the Retirement Security Project.

The bill does have its critics, however. According to the Tribune article,

But knowing what your 401(k) might produce could be a bad thing, said Michael Zwecher, author of “Retirement Portfolios: Theory, Construction and Management.”

Consider the average 401(k) participant whose account balance, according to the Employee Benefit Research Institute/Investment Company Institute, at year-end 2008 was $45,519, down from $65,454 at year-end 2007. That worker, under the bill, would learn that nest egg would produce an estimated $2,700 per year, or $225 per month, of income in retirement.

And once a worker learns how little their 401(k) might produce, Zwecher said, one of two things happen: They increase their contribution, which averages 7 percent, or they increase the amount they invest in stocks, raising their exposure to market risk.

At the moment, the evidence seems to suggest that many workers don’t have a clue about how to invest the money in their 401(k)s.

More information on the bill can be found here and here.