On August 18, 2020, the U.S. Department of Labor (DOL) released an interim final regulation (Interim Rule) regarding the lifetime income illustrations that must be provided annually on participant benefit statements for defined contribution plans.
Section 105 of the Employee Retirement Income Security Act (ERISA) requires that administrators of defined contribution plans provide participants with pension benefit statements at least annually (or, quarterly in the case of plans that allow participants to direct their own investments) that include the value of each participant’s account balance, typically payable as a lump sum.
In December 2019, the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) amended Section 105 of ERISA to require that such pension benefit statements include two illustrations of a participant’s account balance converted to a lifetime income equivalent — one as a single life annuity (SLA) and the other as a qualified joint and survivor annuity (QJSA) at least annually. These lifetime income illustrations are intended to help participants better understand how the amount of their defined contribution plan accounts convert into an estimated monthly payment for the rest of their lives and may help participants with their long-term retirement savings goals.
Required Assumptions to Calculate Lifetime Payments. For purposes of the required lifetime income illustrations, plan administrators must use the following assumptions to convert a participant’s account balance:
- Assumed commencement date and age: Payments are assumed to begin on the last day of the benefit statement period, and the participant is assumed to be age 67 on that date unless the participant is older than 67, in which case the participant’s actual age must be used.
- Assumed marital status and amount of survivor’s benefit: The participant is assumed to be married to a spouse of the same age, regardless of actual marital status or age of spouse, and the benefit payable to the surviving spouse is assumed to be the same as the monthly payment that is payable during the participant’s lifetime (i.e., a 100 % QJSA).
- Assumed interest rate: Assumed monthly payments must be calculated using the 10-year constant maturity Treasury rate as of the first business day of the last month of the benefit statement period.
- Assumed mortality: Assumed monthly payments must be calculated based on the gender neutral mortality table in Internal Revenue Code Section 417(e)(3)(B).
Model Language and Relief From Liability. The Interim Rule requires that pension benefit statements include explanations of the underlying assumptions and provides plan administrators with optional model language to satisfy this requirement. Plan administrators who use the prescribed assumptions and the model language will be relieved from liability against participants who are later disappointed because they are unable to purchase equivalent monthly payments or view such illustrations as a type of investment advice.
The Interim Rule contains 11 paragraphs that specify the required explanations for the benefit statement; each paragraph contains both the necessary explanation as well as the corresponding optional model language. In addition to requiring explanations of the assumptions described above that are used to calculate the assumed monthly payments, the benefit statement generally must also include the following:
- an explanation of a “single life annuity” and a “qualified joint and 100% survivor annuity” as well as the availability of other survivor percentage annuities and the impact of choosing a lower survivor percentage
- a cautionary note to participants that the assumed monthly payments on their pension benefit statements are only illustrations and are not guaranteed and an explanation that a variety of factors could cause the actual monthly payments that a participant may purchase with his or her account balance to be different from the illustrations
- an explanation that the assumed monthly payment amounts are fixed amounts that will not increase for inflation
- an explanation that the monthly income illustrations assume that the participant is 100 percent vested in his or her account and that any plan loans that are not in default have been fully repaid
Special Rules of Existing In-Plan Annuities. The Interim Rule provides special rules for defined contribution plans that offer in-plan annuities through a contract with licensed insurers. Specifically, such plans may either use the Interim Rule’s assumptions or may base the lifetime income illustrations on the actual terms of the contract except for the assumptions relating to commencement date and age, marital status, and age of the spouse. If the plan administrator chooses to use the terms of the actual contract, the illustrations must nevertheless assume (1) that payments commence on the last day of the benefit statement period, (2) that the participant is age 67 (or the participant’s age, if older) on such date, and (3) that the participant has a spouse of the same age. A slightly different version of the model language for the required explanations is included for plan administrations who choose this approach, but the requirement to use such model language to obtain the relief from liability remains the same.
Additional Rules Where Benefit Includes a Deferred Lifetime Stream of Payments. The Interim Rule provides different disclosure requirements for plans that allow participants to purchase deferred income annuity contracts or qualifying longevity annuity contracts but excludes such disclosures from the limitation on liability otherwise available under the Interim Rule. However, any portion of a participant’s account that is not invested in such deferred annuities must still be converted into the lifetime income stream illustrations in accordance with the Interim Rule’s requirements and assumptions. If such requirements and assumptions are met, including the use of the model language, the relief from liability will be available to the portion that is not invested in deferred annuities.
Effective Date and Request for Comments
This Interim Rule will become effective one year after it is published in the Federal Register. The DOL indicated that it intends to issue a final rule before the effective date incorporating any comments received in response to the Interim Rule.
To discuss these issues in more detail and learn how they may apply to your plan, contact your Sidley lawyer or the authors listed below.
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