The Setting Every Community Up for Retirement Enhancement (SECURE) Act included several provisions related to lifetime income strategies under retirement plans, including a requirement that pension benefit statements for defined contribution plans disclose the “lifetime income stream equivalent” of each participant’s current account balance – both as a single life annuity (SLA) and as a qualified joint and survivor annuity (QJSA). On August 18, 2020, the Department of Labor (Department) issued an interim final rule implementing this requirement that includes a model disclosure and assumptions for converting benefits (the Rule), and a fact sheet.
As background, under ERISA, administrators of defined contribution plans (such as 401(k) and 403(b) plans) are required to provide pension benefit statements quarterly if the plan allows participant-directed investment, otherwise annually. Among other requirements, the benefit statements must include the participant’s current account balance.
The Rule requires lifetime income stream illustrations to be provided in defined contribution plan statements at least annually, even if the plan does not include an annuity form of benefit or lifetime income investment option. The required information can be presented in chart form, showing (1) the account balance as of a specified date, (2) the monthly payment if the account balance was paid in a SLA, and (3) the monthly payment if the account balance was paid as a QJSA, as shown in this example from the Rule:
|Account Balance as of [DATE]||Monthly Payment at 67 (Single Life Annuity)||Monthly Payment at 67
(Qualified Joint and 100% Survivor Annuity)
|$125,000||$645/month for life of participant||$533/month for life of participant, and $533/month for life of participant’s surviving spouse|
As required by the SECURE Act, the Rule includes assumptions that must be used when preparing the illustrations:
- Assume the commencement date (the first date payments would start) is the last day of the statement period, regardless of the participant’s actual age.
- Assume the participant is age 67 on the assumed commencement date (unless the participant is older than age 67, in which case the actual age should be used). The Department specifically requested comments on whether age 67 is the most appropriate age and queried whether administrators should be required to include illustrations based on multiple ages on the annuity commencement date (e.g., age 62 and age 67).
- Assume that the participant is married and the spouse is the same age as the participant. Note that the Rule requires the QJSA to be shown assuming a 100 percent survivor lifetime annuity rather than a lower percentage.
- Use an interest rate assumption equal to the 10-year constant maturity Treasury securities yield rate as of the first business day of the last month of the statement period. The Department notes that use of this rate effectively factors in the “insurance load,” meaning the extra amount an insurance company may charge for an annuity product.
- Use the unisex mortality assumptions under Internal Revenue Code section 417.
The monthly payment amounts are not adjusted for inflation. The income illustrations must also assume the participant is 100 percent vested in the account and, for participants who have an outstanding plan loan, that the loan will be fully repaid by the time the participant retires.
The Rule includes certain required explanations that must be included with the illustrations, such as an explanation of an SLA and 100 percent QJSA. It also provides model disclosure language that may be integrated into existing benefits statements and, as an alternative, a model supplement that may be appended to existing benefit statements. The Rule provides that if the administrator uses the model language, the plan fiduciary and sponsor will not have liability solely by reason of providing the lifetime income stream equivalents described in the Rule. The Department indicated this relief is intended to address plan fiduciaries’ concern about whether participants would sue them if actual monthly payments in retirement fall short of the illustrations provided in the benefit statements. Importantly, this limitation of liability is not available if an administrator chooses to provide additional illustrations.
The Rule addresses a number of additional aspects of the disclosure, including special rules for plans with annuity distribution options.
The Rule has not yet been published in the Federal Register, but the lifetime income illustrations will need to be provided beginning 12 months after the date of such publication. The Department notes that it intends to adopt a final rule, after consideration of public comment, sufficiently in advance of the effective date to minimize compliance burdens.
Employers that are renewing or entering into new administrative services agreements should consider providing that the preparation of these disclosures is included in the covered services.