DOL Releases Interim Final Rule on Lifetime Income Illustrations Under SECURE Act

Practical Law Legal Update w-027-0839 (Approx. 5 pages)

DOL Releases Interim Final Rule on Lifetime Income Illustrations Under SECURE Act

by Practical Law Employee Benefits & Executive Compensation

Benefit Statement Background

Plan administrators of defined contribution plans must periodically provide an individual statement reflecting a participant's accrued and vested amounts (ERISA § 105 (29 U.S.C. § 1025)). For plans with participant-directed investments (such as 401(k) plans), the benefit statements must be provided quarterly. For other defined contribution plans, the statements are due annually (see Practice Note, Defined Contribution Plans: Periodic Notices: Periodic Benefits Statement).

In May 2013, the DOL issued an advanced notice of proposed rulemaking (2013 ANPRM), which requested comments on lifetime income illustrations for defined contribution plan benefit statements (see Legal Update, DOL Issues ANPRM Seeking Input on Lifetime Income Illustrations for Benefit Statements). The preamble to the 2020 IFR addresses comments submitted in response to the 2013 ANPRM.

SECURE Act Requires Lifetime Income Disclosures

In December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was enacted (see SECURE Act Compliance Chart). Section 203 of the SECURE Act requires employers to provide defined contribution plan participants with new lifetime income disclosures that:

Include an estimate of the amount of monthly annuity income of the participant's retirement benefit.
Are included on the participant's annual benefit statements.
Are provided once every 12 months.

The SECURE Act directed the DOL to draft a model disclosure within one year of the SECURE Act's enactment. The new lifetime income disclosure requirement would then be effective 12 months after the DOL issues such model.

Interim Final Rule Requirements

The IFR implements the SECURE Act requirement on lifetime income disclosure for defined contribution plans. Under the IFR, the lifetime income disclosure must include the:

Beginning and ending dates of the statement period.
Value of a participant’s account balance as of the last day of the statement period.
Participant's account balance expressed as a lifetime income stream payable in equal monthly payments for the life of the participant (single life annuity).
Participant's account balance expressed as a lifetime income stream payable in equal monthly payments for the joint lives of the participant and spouse as a qualified joint and survivor annuity (QJSA).

Required Assumptions

To calculate the lifetime income streams, the IFR provides a series of required assumptions.

Commencement Date and Age

The assumed annuity commencement date is the last day of the statement period. The participant's age on that date is assumed to be 67, unless the participant is older than 67, in which the actual age must be used.

Marital Status

For purposes of converting the balance to the QJSA, the participant is assumed to be married. The participant's spouse is assumed to the same age as the participant. The QJSA is assumed to have a 100% survivor annuity percentage.

Interest Rate and Mortality

Plan administrators must assume a rate of interest equal to the ten-year constant maturity Treasury (CMT) securities yield rate for the first business day of the last month of the period to which the benefit statement relates. The mortality table to be used is the table under Code § 417(e)(3)(B) (26 U.S.C. § 417(e)(3)(B)), which is a unisex mortality table.

Required Explanations

The IFR contains a series of required explanations about the lifetime income streams. Plan administrators can either:

Insert the explanations (approximately 11 paragraphs) into their existing plan benefit statements.
Attach the Model Benefit Statement Supplement (approximately two pages), which appears in an Appendix to the IFR, to the plan's benefit statements.

The IFR contains separate requirements for plans that have distribution annuities or deferred income annuities.

Limitation on Liability

One concern among employers, service providers, and plan administrators is potential litigation arising from the illustrations if, for example, a participant believes the illustrations are guarantees of a particular income stream or interprets them as investment advice.

To address this concern, and as provided for in the SECURE Act, the IFR includes a limitation on liability under ERISA Title I for plan fiduciaries, plan sponsors, or other persons if:

The lifetime income stream equivalents are calculated in accordance with the IFR's assumptions.
The benefit statement includes the IFR's model language or language substantially similar in all materials respects.

The liability relief does not apply to disclosures about deferred income streams.

Practical Implications

The DOL is requesting comments on many issues in the IFR, ranging from the assumed ages and interest rates for the calculations, to the model disclosure language. Comments on the IFR are due November 17, 2020. The IFR itself will be effective on September 18, 2021, and apply to benefit statements issued after that date. In the preamble, the DOL stated that it intends to adopt a final rule sufficiently in advance of the effective date to give plan administrators time to comply.

Plan administrators, plan sponsors, and service providers should familiarize themselves with the IFR and be prepared to implement the new lifetime income disclosure requirement in 2021.

DOL Releases Interim Final Rule on Lifetime Income Illustrations Under SECURE Act | Practical Law