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DOL releases interim final rule on lifetime income illustrations

DOL releases interim final rule on lifetime income illustrations

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The SECURE Act of 2019 modified the defined contribution plan benefits statement rules to require the inclusion of lifetime income. On August 18, the DOL released an interim final rule, including model disclosures and the assumptions plan administrators must use to calculate estimated lifetime income amounts. Using the model disclosures may limit fiduciary liability. The rule is expected to be effective by the end of the third quarter, 2021.

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Background

As the U.S. private retirement system has trended from defined benefit to defined contribution plans, the primary form of distribution has also shifted from annuities to lump sums. This has raised concerns among policymakers that participants may not be up to the task of managing a lump sum to provide a stream of retirement income that will last through a post-employment lifetime. Some have expressed concern that participants may have a mistaken impression of how much lifetime income their account balances can actually purchase, particularly in a low interest rate environment.

So in 2010, the DOL issued a request for information on lifetime income options in retirement plans, which included questions on how best to disclose the income stream that can be provided from an individual account balance in a defined contribution plan. In 2013, the DOL issued a proposed set of rules requiring up to four lifetime income illustrations: (1) a single life annuity based on the current account balance; (2) a qualified joint and 50% survivor annuity, if the participant is married, based on the current account balance; (3) a single life annuity based on a projected account balance (current account balance projected to normal retirement age, taking into account estimated investment returns, future contributions, and inflation); and (4) a qualified joint and 50% survivor annuity, if the participant is married, based on a projected account balance. While the proposed rules generated over 125 comments, it didn’t result in any additional regulations being issued.

After a period of relative inactivity, this topic became reenergized with passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019 that requires defined contribution plan benefits statements to include lifetime income disclosures at least annually and directed the DOL to develop rules implementing this change. The Act provided for a limitation on fiduciary liability if the DOL’s model lifetime income disclosure is used.

On August 18, the DOL issued an interim final rule, including model disclosures, on lifetime income disclosures. This rule will become effective one year after it is published in the Federal Register. With the rule expected to be published by early September, this sets the effective date at late summer 2021 and would be applicable to benefits statements provided after that date. Assuming this timing remains unchanged, an annual lifetime income disclosure on benefits statements could be required as early as the third quarter, 2021.

There is now a 60-day comment period that opened with issuance of the interim rule.

Interim final rule

The rule requires that at least once per year an illustration be provided to the participant (including an alternate payee with an account balance) with the following information:

  • Value of the account balance (including any outstanding loan balance) as of the last day of the statement period;
  • Account balance expressed as a single life annuity payable monthly for the participant’s life beginning at age 67 (or actual age, if older); and
  • Account balance expressed as a 100% joint and survivor annuity payable monthly for the joint lives of the participant and spouse beginning as of participant’s age 67 (or actual age if older) that is defined as the qualified joint and survivor annuity (QJSA).

This required information might appear on the benefits statement as follows:

Account balance as of [DATE] Monthly payment at 67 (single life annuity) Monthly payment at 67 (100% QJSA)
$125,000 $645/month for life of participant $533/month for life of participant

$533/month for life of participant’s surviving spouse

Assumptions for lifetime income stream illustrations

  • The annuity starting date is the last day of the statement period.
  • Participant is presumed to be age 67 (or actual age, if older) on the commencement date.
  • Participant is presumed to be married with a spouse who is the same age.
  • Constant Maturity Treasury (CMT) rate is used for interest rate assumption.
  • Gender-neutral mortality table in Section 417(e)(3)(B) of the Internal Revenue Code is used.

DOL considered but did not require that the assumptions reflect insurance costs (e.g., insurer profits, fee, etc.) and inflation.

Model language

To qualify for fiduciary liability safe harbor, the DOL provided model language for explanations of the following assumptions/factors that must be included on the statement:

  • Age and commencement date used
  • Single life annuity
  • Qualified joint and survivor annuity
  • Marital status
  • Interest rate
  • Mortality assumptions
  • Amounts listed are not guaranteed
  • Why actual monthly income can vary from amounts listed
  • Quoted amounts are not adjusted for inflation
  • Account is 100% vested
  • Any outstanding loans are not in default and will be fully repaid by retirement

Special rules for in-plan annuities

If a plan provides for annuities as an optional form of distribution, the two mandatory lifetime income illustrations can be based on the terms of the insurance contract showing the two lifetime income streams — single life annuity and QJSA — with the assumptions that the first payment is made on the last day of the statement period, the participant is age 67 (or actual age, if older) on such date, and the participant has a spouse the same age.

Some plans allow participants to purchase deferred income annuities (DIA) with their account balances. This involves making ongoing purchases toward a future stream of retirement income that is provided by an insurance company. For any portion of a participant’s account that was used to purchase a DIA, the plan can exclude that portion of the participant’s account for purposes of the mandatory lifetime income disclosures. The statement must still include the amounts payable under the DIA including the actual commencement date and age; form, frequency and amount of the deferred payments; survivor benefits; and other features of the DIA.

Limitation on liability

The rule provides that no plan fiduciary, plan sponsor, or other person shall have any liability under Title I of ERISA solely by reason of providing the lifetime income stream equivalents as stipulated. To qualify, the plan administrator must use the specified assumptions and model language that is “substantially similar in all material respects” to the DOL’s language.

In closing

This rule is likely to change as a result of the comments received, but it does appear this ten-year effort to encourage participants to think about their defined contribution balance in terms of producing lifetime income is moving towards fruition. In the interim, sponsors may want to consider additional steps they can take beyond what the rule requires to assist participants in meeting their post-retirement income needs.


Volume 43 | Issue 56

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