Editor's Note: This article updated as of October 2, 2020.
Earlier this year, we discussed the lifetime income disclosure requirement that was included in the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). When the disclosure requirement becomes fully effective, the benefit statement issued by each ERISA-governed defined contribution plan must include lifetime income illustrations and explanations.
New Developments. On August 18, 2020, the Department of Labor (DOL) began the process of implementing the lifetime income disclosure requirement. The DOL issued an interim final rule (IFR) and accompanying Fact Sheet outlining requirements and certain procedures.
Compliance Date. The IFR becomes effective one year after publication of the rule in the Federal Register. Publication occurred on September 18, 2020, giving the IFR an effective date of September 18, 2021. The required disclosure must be made at least once in any 12-month period. However, additional guidance will be needed regarding the deadline for distributing the initial disclosure.
Requirement Does Not Depend Upon Whether Plan Offers Annuities or Lifetime Distribution Options. When the rule takes effect, defined contribution plans must estimate and disclose the lifetime retirement income, i.e., the periodic annuity benefit that can be provided through the participant’s defined contribution account balance. The concept is that seeing lifetime income illustrations as part of the benefit statement will allow participants to better understand both the progress that they are making in saving for retirement, and how the amount in their plan account translates to potential retirement income. Importantly, the new disclosure requirement will apply whether or not the defined contribution plan provides or offers an annuity or lifetime income form of distribution. Of course, the requirement that defined contribution plans include lifetime income disclosures might provide indirect pressure on plan sponsors to add lifetime income options. Further, lifetime income disclosures might be confusing to some participants in a plan that does not offer lifetime income options. Nevertheless, the premise of the requirement is that participants in general will be better served in their retirement planning by having the lifetime income disclosures and illustrations, regardless of whether the plan itself offers such an option.
What Must be Disclosed? Each participant’s defined contribution account balance is converted (for purposes of illustration) into both a single life annuity (SLA) and a 100% joint and survivor annuity (QJSA). These periodic benefit amounts will be disclosed to the participant as part of the benefit statement, together with an explanation of the assumptions used to generate the illustration. The QJSA illustration is required whether or not the participant is married on the statement date. Spouses are assumed to be the same age as the participant.
Model DOL Language and DOL Approved Assumptions. The IFR contains model language, including a disclaimer that the periodic payment amounts shown are solely for purposes of illustration and are not guaranteed. Plan sponsors should seriously consider using both the DOL’s model language and DOL-approved actuarial assumptions (with special rules for plans that offer annuity payment options). The use of DOL-approved methodology, assumptions and language will provide the plan sponsor and plan administrator with the greatest possible legal protection in connection with the disclosures. A plan fiduciary or plan sponsor that provides lifetime income illustrations using the assumptions set forth in the IFR and the model language explanation (or language substantially similar to the model language), is not to be liable under ERISA for providing the lifetime income illustrations.
Will Participants Understand? In the IFR, the DOL opted for disclosure of what the participant’s current defined contribution account balance will “purchase” in terms of a periodic annuity benefit. Thus, the illustration assumes that the participant is age 67 (or actual age, if older) on the benefit statement date and that the SLA and QJSA benefits commence immediately on that date. This might be confusing to younger participants, for it essentially assumes no growth in the account balance between the statement date and the date on which the participant will attain age 67 - the current account balance is deemed, for purposes of the illustration, to be the account balance that the participant will have at age 67. This is conservative and in all likelihood will understate the participant’s actual account balance and potential retirement income at age 67. One justification for this approach might be that a conservative estimate potentially incentivizes younger participants to increase their retirement savings. However, participant confusion is also quite possible. The participant might have access to other tools—both employer-provided and other “retirement calculator” tools—that include an assumption of future earnings between the calculation date and the assumed retirement date, meaning that the plan-provided disclosures (with no future earnings assumption) might differ substantially from the estimates provided in other tools available to the participant. The DOL has specifically asked for comment on this issue, and this is an area that might change when the rule is again published. Although an explanation of the assumptions will be part of the disclosure, this aspect might be confusing to participants.
This is a developing topic, and changes in the rule are possible. However, plan sponsors should begin discussions with their defined contribution record-keepers and vendors to understand how those providers intend to implement the new rules.
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