The Countdown Begins for Lifetime Income Disclosures

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The SECURE Act of 2019 made three statutory changes to ERISA regarding lifetime income benefit payments from defined contribution plans (e.g., 401(k), 403(b), profit sharing, and money purchase pension plans).  This blog will cover one of those changes – an amendment to Section 105 of ERISA.  Section 105 requires the plan administrator to issue periodic benefit statements to participants and requires the disclosure of certain information on those statements, such as the participant’s account balance, vesting, and the value of each investment in the account.  The SECURE Act imposes a new disclosure requirement on defined contribution plans:  the inclusion of two lifetime income illustrations in participant benefit statements at least once every 12 months; it does not require plans to offer a lifetime income distribution option.  The SECURE Act directed the Department of Labor (DOL) to issue an interim final rule (IFR) to implement the statutory change by December 20, 2020.  On August 18, 2020, the DOL issued the IFR.

This type of additional disclosure has been under consideration for some time.  In 2013, the DOL issued an advance notice of proposed rulemaking (ANPRM) on Section 105 in which it considered requiring up to four illustrations of lifetime income payments in participant benefit statements:  two single life annuities (one based on the participant’s current account balance and one on the participant’s projected account balance)  and two 50% qualified joint and survivor annuities (one based on the participant’s current account balance and one on the participant’s projected account balance).  In drafting the IFR, the DOL appears to have taken into account comments to the 2013 ANPRM, e.g., the IFR eliminates the illustrations using projected account balances and replaces the 50% survivor annuity with a 100% survivor annuity.

New Rule.  At least once every 12 months, a participant must receive two lifetime income illustrations with the participant’s benefit statement – a single life annuity illustration and a 100% QJSA illustration.  The IFR defines a participant for this purpose to include an individual beneficiary with an individual account under the plan.  Thus, the new illustrations must be provided to an employee, former employee, a beneficiary of a deceased employee/former employee, and an alternate payee under a QDRO, provided an account has been established for them under the plan.

The reason for requiring the disclosure of lifetime income payments is to help participants better understand how their plan benefit could convert into monthly payments for their lifetime – which should help participants better plan for their retirement.

Assumptions.  It is necessary to utilize many assumptions in order to convert an account balance into a lifetime income stream of payments.  Plan administrators are not left to figure this out on their own.  The IFR sets forth the assumptions that must be used in calculating the lifetime income payments for the illustrations.  These assumptions are:

  • The commencement date of benefit payments is the last day of the period covered by the benefit statement.
  • The age of the participant on the commencement date is 67. If the participant is older than 67 on the commencement date, then the participant’s actual age is used.
  • The participant is assumed to be married.
  • The participant’s spouse is assumed to be the same age as the participant.
  • The survivor benefit is a 100% qualified joint and survivor annuity.
  • The participant is assumed to be 100% vested in the account balance. This means that the illustration is based on 100% of the participant’s accrued benefit regardless of actual vesting.
  • An outstanding loan balance is included in the account balance. This assumes that the loan will be repaid in full and therefore available for retirement income.  However, if the participant is in default on a loan on the statement date, the defaulted loan balance is not included in the illustration.
  • The interest rate is the ten-year constant maturity Treasury security (CMT) yield rate for the first business day of the last month of the period covered by the benefit statement.
  • Mortality is determined under the Code Section 417(e)(3)(B) table for the calendar year that contains the last day of the period covered by the benefit statement.

Notably, the assumptions do not include an insurance load (the difference between the market price of the annuity and the price of an actuarially fair annuity), nor does it include an adjustment for inflation.

Explanations.  The illustrations must be accompanied by an explanation of the illustrations and the underlying assumptions.  The IFR includes “model” disclosure language that the plan administrator may use to meet this requirement.  Two different model formats are provided:  a stand-alone disclosure statement that can be attached to the existing benefit statement and 11 itemized inserts that may be integrated into the existing benefit statement format in any manner as long as the resulting disclosure is reasonably calculated to be understood by the average participant.  The primary purpose of the explanations is to make it clear that the payment amounts illustrated are not guaranteed.  While an explanation is required, use of the model language is optional.  However, the model language must be used in order to obtain relief from liability (discussed below).  The 11 inserts describe the following:

  • The payment commencement date and the participant’s age on the commencement date, along with an explanation of how an earlier or later date/age could change the benefit payment.
  • What a single life annuity is and how it works.
  • What a 100% qualified joint and survivor annuity is and the availability and effect of other survivor annuity percentages under the plan.
  • The marital status and spousal age assumptions along with an explanation of how the payments are affected if the spouse is not the same age as the participant.
  • The interest rate assumption and use of the CMT rate.
  • The mortality assumption and the use of the IRS Tables.
  • The illustrations are estimates only and are not guaranteed payment amounts.
  • Actual payments may vary substantially based on many factors.
  • The illustrations provide fixed amounts only without any adjustment for inflation.
  • The assumption that the participant is 100% vested in the account balance.
  • The assumption that the participant will repay in full any outstanding loans.

Special Rules for Plans with Annuities.  The IFR contains some special rules for plans that purchase commercial annuities to pay benefits and for plans that allow participants to invest in deferred annuities during their participation in the plan.  For commercial annuities, some of the factors used to calculate the benefit payments may be based on the terms of the commercial annuity purchased by the plan from which benefit payments will be made.  With deferred annuities, the portion of the participant’s account that consists of the deferred annuity is treated separately for purposes of the illustrations.  The portion not invested in the deferred annuity uses all of the standard assumptions for illustrating the lifetime income for that part of the participant’s account.  For the portion invested in the deferred annuity, the plan administrator must disclose the amounts payable under the deferred annuity (in current dollars) and the commencement date for payments set forth in the annuity.  Any survivor benefit, term certain or similar feature must be disclosed, and the disclosure must state whether payments are fixed or if they adjust with inflation or any other factor.

Limitation on Liability.  A key feature of the IFR is that is contains a strong and clear limitation of liability when the illustrations and explanations are made in accordance with the disclosure rule.  No fiduciary, plan sponsor or other person is liable under ERISA solely by reason of disclosing the lifetime income payments, provided the payments are based on the IFR assumptions and the benefit statements include language substantially similar in all material respects to the model language (either the inserts or the stand-alone statement).  This relief is available even if the plan administrator provides the illustrations more frequently than annually or makes minor nonsubstantive changes to the model language or benefit statement format, provided the changes do not, individually or in combination, affect the substance, clarity, or meaning of the model language.  No relief from liability is provided for the illustrations of the deferred annuities or for any illustrations that may be provided to participants other than those required under the IFR.

Effective Date.  The new disclosure rule applies to benefit statements issued more than 12 months after publication of the IFR in the Federal Register.  As of the date of this blog, the IFR has not been published in the Federal Register.  The DOL requested comments on the IFR and has indicated that before the effective date of the IFR, it intends to issue a final regulation that will take into account the comments received, and supersede the IFR.  This blog will be updated to provide the actual effective date when it is known.  In the meantime, plan administrators will want to add to their “to do list” a discussion with their benefit statement vendor about the upcoming disclosure requirements to ensure timely and accurate disclosure of lifetime income payment streams.

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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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