Pension Benefit Statement Update – Lifetime Income Illustrations Requirement

Thoughtware Article Published: Jun 16, 2021
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 August 18, 2020. The DOL has stated that it intends to issue a final rule in advance of the proposed September 18, 2021, effective date. The IFR requires defined contribution plans (including employee stock ownership plans) 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 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:

DOL Benefit Statement Example

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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