The deadline for complying with the defined contribution (DC) plan lifetime income disclosure requirement is quickly approaching. Now is the opportunity for plan sponsors and retirement committees to reacquaint themselves with the requirements and prepare for how to proactively use the changes to promote plan participation, education, and conversation regarding their retirement plans.
In December 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). Section 203 of the SECURE Act specifically amended Section 105 of the Employee Retirement Income Security Act of 1974 (ERISA), the section that relates to the participant benefit statement requirements applicable to ERISA-covered employer-sponsored retirement plans. The changes require DC retirement plans, such as 401(k), 403(b), or profit-sharing plans, to give a few specific lifetime income illustrations on the participant benefit statements at least annually. To meet this requirement, the over 700,000 DC plans (benefiting 137 million participants)1 covered by ERISA must express each participant’s current account balance as two monthly income illustrations—both a single life annuity (SLA) and a qualified joint and survivor annuity (QJSA).
The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) issued an interim final rule (IFR) that was published in the Federal Register on September 18, 2020, regarding the SECURE Act’s lifetime income illustrations requirements, giving ERISA DC plan sponsors and plan administrators 12 months after that date as a deadline to begin furnishing the lifetime income illustrations on participant benefit statements at least annually.
The IFR provides a set of assumptions to use in preparing the lifetime income illustrations, as well as model language that is intended to be understood by the average plan participant, which can be used to explain the lifetime income illustrations.
By providing the lifetime income disclosure using the DOL guidelines and model language, plan sponsors, plan fiduciaries, and third-party administrators (TPAs) can rely on this regulatory safe harbor in formal or informal disputes or challenges with the participants for the differences that will occur when benefits are certified.
Milliman published a Benefits Alert that sums up the methodology and model language, which can be found here.A quick summary of the interim final rule:
- The lifetime income disclosure must be “written in a manner calculated to be understood by the average plan participant” and contain:
- The statement period beginning and ending dates.
- The value of the account balance as of the last day of the statement period, expressed as an equivalent lifetime income stream payable in equal monthly payments as both an SLA and a QJSA.
- Assumptions for converting an account balance into lifetime income streams:
- Annuity start date: The last day of the benefit statement period.
- Age on annuity start date: Age 67 or actual age greater than 67.
- Marital status and survivor benefit for QJSA: A same-age spouse (regardless of actual marital status or actual age of any spouse), and survivor annuity percentage of 100%.
- Interest rate: The 10-year constant maturity Treasury securities rate as of the first business day of the last month of the statement period to calculate the monthly payments.
- Mortality: Unisex mortality described in Internal Revenue Code (IRC) Section 417(e) for defined benefit (DB) pension plans.
- Plan loans: Account balance includes outstanding loan balances not in default.
The IFR gave plan sponsors and plan administrators of ERISA DC retirement plans one year following the date it was published to prepare for and distribute participant benefit statements that include the first round of annual lifetime income disclosures. This means the average DC plan participant will see this disclosure for the first time on the March 31, 2022, quarter-end or June 30, 2022, quarter-end benefit statement. Now the question becomes what can DC plan sponsors and plan administrators expect in the wake of the first distribution of the lifetime income illustrations?
The answer varies from nothing, as many participants will not dissect the statement enough to notice the new disclosure, to potentially raising many questions for participants who find it alarming that their current account balance may not equate to a monthly retirement income that will support their desired retirement lifestyle.
What can plan sponsors and plan administrators do to make this new disclosure rollout go as smoothly as possible?
Be familiar with the requirements and the goal.
The lifetime income illustrations are required by the SECURE Act to be provided at least annually to participants in ERISA-covered defined contribution retirement plans. But DC plans that have participant-directed investments that are required to provide quarterly participant benefit statements may be more likely to provide updated lifetime income illustrations with each quarterly participant statement. Every plan sponsor and plan administrator should be prepared to explain to participants that the overall goal of this disclosure requirement is to bring awareness to what they are individually saving and assist them in determining their retirement readiness.
Discuss the rollout and communication strategy with your plan’s recordkeeper.
Make sure your recordkeeper is prepared for the rollout. Have they made the programming changes to the participant benefit statements in time to meet the IFR deadlines, requirements, and model language so that you, as the plan sponsor, qualify for the fiduciary liability relief that the IFR provides if the model language is used? Will any ancillary participant communications be provided that will explain the lifetime income disclosure, why it is being provided, how it is calculated, and whether there are any potential participant behaviors that could be modified to impact the participant’s retirement readiness outcome favorably? Does this ancillary communication make it clear to your participants that the disclosure is showing their current account balance as a lifetime annuity option to fulfill the requirements of the SECURE Act and you are not modifying your plan’s distribution options to add an annuity?
Start planning for participant education sessions.
Is it possible to discuss this new disclosure requirement on a high level at an open education session for your plan participants and coordinate the timing of the session with the delivery of the first benefit statement that includes the new lifetime income illustrations? Does you plan advisor or recordkeeper offer options that may benefit your participants? They may include overall financial wellness sessions, one-on-one sessions, or a retirement readiness calculator that updates to more current, real-time projections of retirement income. These other retirement readiness calculators typically allow a participant to factor in other retirement income sources, investments, or savings vehicles and project a participant’s account balance to a future amount taking into consideration anticipated growth for future contributions and market returns and other factors such as inflation and interest rates, the combination of which is intended to provide a more accurate projection of retirement readiness than converting a participant’s current account balance to a monthly lifetime income stream. Now is the time to get these participant education sessions on the calendar and start promoting them to your participants!
Consider whether the retirement plan is fostering an environment that promotes retirement savings.
If you don’t believe it is, consider implementing plan design changes that may improve your plan participants’ potential retirement income. Adding automatic enrollment to your 401(k) or 403(b) plan may increase plan participation, grow participant account balances, and in return improve the resulting lifetime income illustrations. An automatic reenrollment effort or annual automatic increase applicable to those participants who are below or already at your plan’s automatic enrollment rate may benefit participants who have not looked at their accounts or are assuming that the initial automatic enrollment rate is enough to support their retirement savings over the course of their employment.
While the new lifetime income illustration requirements of the SECURE Act may seem daunting, a little planning, communication, and partnership with their plan recordkeepers may allow plan sponsors and plan administrators to utilize this new disclosure requirement to reconnect with plan participants and promote retirement readiness.
Additional information from the DOL on the interim final rule and lifetime income illustrations can be found here:
1 EBSA (September 2021). Private Pension Plan Bulletin Abstract of 2019 Form 5500 Annual Reports. Retrieved June 7, 2022, from https://www.dol.gov/sites/dolgov/files/EBSA/researchers/statistics/retirement-bulletins/private-pension-plan-bulletins-abstract-2019.pdf.