Labor Proposes Required Lifetime Income Estimates On 401(k) Benefit Statements

by Stinson Leonard Street - Employee Benefits & Compensation

Congressional hearings on the status of the Social Security system and studies on workers’ retirement readiness have sparked interest in lifetime income solutions from defined contribution plans. With 401(k) and other account based plans being the predominant form of retirement plan vehicle, the vast majority of workers will be relying on a 401(k) plan and Social Security to fund their retirement. Periodically, workers receive an estimate of their social security monthly benefit from the Social Security Administration. However, under current practices, employees receive periodic (usually quarterly) statements from their 401(k) plan provider only their current account balance and recent activity.

In May 2013, the U.S. Department of Labor Employee Benefits Security Administration (EBSA) issued an advance notice of proposed rulemaking and a related fact sheet requesting comments to a proposed rule that would require defined contribution pension plans (such as 401(k) profit sharing plans) to include in participant benefit statements, illustrations of what the participant’s current and projected account balance will provide to the participant (and spouse if married) as a lifetime monthly benefit.  The proposed regulation sets out guidelines for plan administrators to use to convert the account balance into monthly income. A safe harbor that is outlined in the proposal (which would not be required to be used), would allow plan administrators to assume, 1) the most recent participant contribution amounts will continue until normal retirement age increasing at a rate of 3% per year; 2) a discount rate of 3% per year to show the projected account balance at retirement in today’s dollars; and 3) an investment return of 7% per year during the accumulation phase.

When converting the current and projected normal retirement age account balances, the plan administrators would be able to use the following conversion factors:

  1. The ten year constant maturity Treasury rate of interest during the draw down period; and
  2. The Code Section 417(e)(3)(b) IRS published unisex mortality table.

The proposal would further allow the plan administrator to illustrate using either of two methods. The first, a systematic withdrawal method under which the participant would withdraw a fixed dollar amount or a fixed percentage until the account is depleted (i.e., 3, 4 or 5 percent).  Alternatively, the plan administrator can show the benefit as a lifetime monthly annuity similar to a defined benefit plan. The proposal includes an appendix with a sample showing the assumptions used and the conversion of a participant’s projected account balance of $557,534.

As healthcare advances increase longevity, plan participants and plan sponsors are becoming more concerned about retirement savings and the participant’s ability to sustain an income flow during their lifetime. The DOL proposal is motivated by the premise that providing plan participants with more information will motivate them to make better personal saving and investment decisions with respect to their 401(k) plan.

The EBSA is requesting comments with respect to the disclosures, the proposed safe harbors and assumptions.

Comments are due by email or regular mail to the Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, DC 20210 Attention: Pension Benefits Statements Project or including RIN 1210-AB20 in the subject line by July 8, 2013.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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