Department of Labor Provides Clarification of Lifetime Income Illustrations Requirements

Thoughtware Alert Published: Jan 19, 2022
Commercial Services

On December 20, 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). The SECURE Act effectively amended the Employee Retirement Income Security Act of 1974 (ERISA) to require that “a lifetime income disclosure” be included with one pension benefit statement during any one 12-month period. In response, the U.S. Department of Labor (DOL) released an interim final rule (IFR) on September 18, 2020, that requires the disclosures to be provided effective one year after this rule was issued (September 18, 2021). The DOL initially stated its intention to issue a final rule in advance of the proposed September 18, 2021, effective date. However, that date has passed and the DOL has declined to commit to a new date and instead stated that the final rule will be issued “as soon as practicable.” 

On July 26, 2021, the DOL issued “temporary implementing FAQs” to provide clarity on the timing of the initial disclosure. For nonparticipant directed individual account plans required to furnish a participant statement once each calendar year, e.g., employee stock ownership plans (ESOP), the first “lifetime income disclosure” should be included on the participant statement for the first plan year ending on or after September 19, 2021. For most plans, this will begin with plan years ending December 31, 2021. However, if a fiscal year plan ends on or after September 19, 2021, then the next annual statement shall provide the “lifetime income disclosure.”

The IFR requires defined contribution plans (including ESOPs) to provide each participant with an estimate of the amount of monthly retirement benefits they could receive if their account was used to purchase an annuity. The participant’s current account balance must now be shown as both a single life annuity (SLA) and a qualified joint and survivor annuity (QJSA) regardless of whether the participant is married on the statement date. These calculations are meant to help participants better understand their future benefits for retirement planning.

Required Assumptions

When converting a participant’s account balance into these new lifetime income monthly payment illustrations, there are six assumptions laid out in the IFR:

  1. Commencement Date & Age: Payments will begin on the last day of the statement period and will assume the participant is age 67 (or the participant’s actual age if older).
  2. Marital Status & Amount of Survivor’s Benefit: For SLA, participants are assumed to receive a fixed monthly amount for the life of the participant, with no survivor benefit after the participant’s death. For QJSA, participants are assumed to have a spouse of equal age regardless of actual marital status and actual age of spouse.
  3. Interest Rate: Rate equal to the 10-year constant maturity Treasury securities (CMT) rate for the first business day of the last month of the statement period.
  4. Mortality: Participant’s mortality will be based on the applicable, gender-neutral (unisex) mortality rate under Internal Revenue Code Section 417(e)(3)(B).
  5. The payments are assumed to be level over the payment period, with no inflation adjustment.
  6. Income stream assumptions do not include an “insurance load” or fees that may apply to the purchase of an annuity.

Example Illustration

The DOL has provided the following example to help individuals understand these requirements: 

Facts: 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 percent per annum on the first business day of December. The benefit statement of this participant would show:

Current Amount Balance $125,000
Single Life Annuity (SLA) $645 per month for life (assuming Participant X is age 67 on December 31, 2022)
Qualified Joint and 100% Annuity $533 per month for participant’s life, and $533 for the life of spouse following participant’s death (assuming Participant X and her hypothetical spouse are age 67 on December 31, 2022)

Required Explanations & Model Language

To assist participants in understanding these new illustrations, the IFR requires certain explanations and language to be included with the annual statements. The explanations are to help participants understand how the estimated monthly payment is calculated and clarify that these estimates are illustrative, not guaranteed. The IFR does provide model language that includes all the required information. Plan administrators may integrate this model language directly into their existing statements. Alternatively, there are supplemental statement explanations in the appendixes to the IFR that can be included as a separate document along with the participant statements. 

Limitation of Liability

The IFR provides that no plan fiduciary or plan sponsor shall have liability under ERISA by reason of providing the required lifetime income illustrations. Plan administrators should ensure these illustrations follow the model disclosure language or that the language is “substantially similar in all material respects” to the DOL’s model language. 

For more information on this IFR, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.

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