Earlier this year, we discussed the lifetime income disclosure requirement included in the Every Community Establishment for Retirement Enhancement Act of 2019 (the “SECURE Act”). When the disclosure requirement takes full effect, the benefit statement issued by each defined contribution plan governed by ERISA 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 has published an Interim Final Rule (IFR) and an information sheet outlining the requirements and some procedures.
Compliance date. The IFR comes into effect one year after the rule is published in the Federal Register (DOL published the IFR on August 18, 2020, but publication in the Federal Register has not yet taken place). The required disclosure must be made at least once every 12 months. However, additional guidance will be required regarding the timing of the release of the initial disclosure.
The requirement does not depend on whether the plan offers annuities or lifetime distribution options. When the rule comes into effect, defined contribution plans must estimate and disclose the lifetime retirement income, that is, the periodic annuity benefit that can be provided through the member’s defined contribution account balance . The concept is that seeing lifetime income illustrations on the benefit statement will allow plan members to better understand both the progress they are making in saving for retirement and how much of their plan account translates into potential retirement income. It is important to note that the new disclosure requirement will apply whether or not the defined contribution plan provides or offers an annuity or some form of lifetime income distribution. Of course, requiring defined contribution plans to include lifetime income information could put indirect pressure on plan sponsors to add lifetime income options. Also, lifetime income disclosure can be confusing for some members of plans that don’t offer lifetime income options. Nonetheless, the premise of the requirement is that members in general will be better served in their retirement planning by having lifetime income disclosures and illustrations, whether or not the plan itself offers such an option.
What should we disclose? Each participant’s defined contribution account balance is converted (for illustrative purposes) into both a single life annuity (SLA) and a 100% joint and survivor annuity (QJSA). These periodic benefit amounts will be disclosed to the member as part of the benefit statement, along with an explanation of the assumptions used to generate the illustration. The QJSA illustration is required whether or not the member is married on the statement date. Spouses are assumed to be the same age as the participant.
DOL language model and DOL-approved assumptions. The IFR contains model language, including a disclaimer that the periodic payment amounts shown are for illustrative purposes only and are not guaranteed. Plan sponsors should seriously consider using both DOL model language and DOL-approved actuarial assumptions (with special rules for plans that offer annuity payment options). Using DOL-approved methodology, assumptions, and language will provide the plan sponsor and plan administrator with the greatest possible legal protection with respect to disclosures. A plan trustee or plan sponsor who 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), will not be liable under ERISA for providing the lifetime income illustrations.
Will the participants understand? In the IFR, the DOL opted to disclose what the member’s current defined contribution account balance will “buy” in terms of the periodic annuity benefit. Thus, the illustration assumes that the member is 67 (or actual age, if older) on the benefit statement date and that SLA and QJSA benefits begin immediately on that date. This could be confusing for younger participants, as it essentially assumes that there is no growth in the account balance between the statement date and the date the participant turns 67 – the current account balance is deemed, for purposes of illustration, to be the account balance that the participant will have at age 67. This is conservative and will likely underestimate the member’s actual account balance and potential retirement income at age 67. A rationale for this approach could be that a conservative estimate potentially incentivizes younger participants to increase their retirement savings. However, confusion of participants is also quite possible. The member may have access to other tools – provided by the employer and other “retirement calculator” tools – which include an assumption of future earnings between the calculation date and the presumed retirement date, which means that the information provided by the plan (without assuming future earnings) could differ significantly from estimates provided in other tools made available to the participant. The DOL specifically asked for comment on this issue, and this is an area that may change when the rule is republished. Although an explanation of the assumptions is part of the disclosure, this aspect could be confusing for participants.
This is a developing topic and rule changes are possible. However, plan sponsors should engage in discussions with their defined contribution registrars and providers to understand how those providers intend to implement the new rules.