The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 required, for the first time, that administrators of defined contribution plans (such as 401(k) plans) provide participants with disclosures regarding estimated lifetime income payments. Such estimates are designed to help employees evaluate their ability to retire by giving them an educated estimate of how their savings in the plan might translate into lifetime income payments.

Pursuant to the SECURE Act, the Department of Labor’s Employee Benefits Security Administration (EBSA) recently announced an interim final rule to implement these provisions of the SECURE Act. The EBSA also published a fact sheet.

The SECURE Act amended the pension benefit statement requirements under section 105 of the Employee Retirement Income Security Act of 1974 to require a participant’s accrued benefits to be included on his or her pension benefit statement as a current account balance and as an estimated lifetime stream of payments. Using assumptions set forth in the rule, plan administrators will be required to show participants equivalents of their retirement savings as monthly income under two potential scenarios: first, as a single life income stream (single life annuity), and second, as an income stream that factors in a survivor benefit (joint and survivor annuity). These illustrations are required to be provided to participants at least once every 12 months; most administrators will likely include such information with annual participant statements.

Under the rule, retirement plans would be required to provide lifetime income illustrations using several prescribed assumptions, which generally include an assumed retirement age (67), use of the 10-year constant maturity Treasury rate (10-year CMT), and use of the gender neutral mortality table used to determine lump sum cash-outs from defined benefit plans.

Example:

Participant X is age 40 and single. Her account balance on December 31, 2022, is $125,000. The 10-year CMT rate is 1.83% per annum on the first business day of December. The benefit statement of this participant would show:

There are also special rules for plans that offer in-plan distribution annuities through an insurer and for plans that allow participants to purchase deferred income annuities that pay a specified dollar amount at retirement.

Retirement plans must provide explanations about what the lifetime income illustrations mean and the assumptions used to calculate the illustrations. To assist plan administrators, the rule includes model language that may be used to provide for such explanations. Plan fiduciaries (as well as plan sponsors and other persons) that use the regulatory assumptions and the model language will qualify for liability relief and will not be held liable in the event participants are unable to purchase equivalent monthly payments when they elect to receive their benefits under a plan that provided such illustrations.

The rule is not perfect in that it uses a one-size-fits-all approach that may result in some projections that prove to be inaccurate. However, it does at least begin the process of allowing plan administrators to provide estimates of the amount of lifetime income benefits that may be available without incurring liability. That information should be helpful to participants approaching retirement.

The rule will be effective 12 months after the date of its publication in the Federal Register. It also includes a 60-day comment period.