Pension Benefit Statements – Lifetime Income Illustrations, 29 CFR Part 2520, 85 Fed. Reg. ___ (___, 2020); Fact Sheet: Pension Benefit Statements – Lifetime Income Illustrations (Aug. 18, 2020)
The DOL has announced interim final regulations implementing the lifetime income disclosure requirement added to ERISA by the SECURE Act (see our Checkpoint article). Under that requirement, pension benefit statements provided by ERISA-covered defined contribution plans (including 401(k) plans) must include the participant’s account balance and express that account balance as a lifetime income stream paid in equal monthly installments, both as a single life annuity and as a qualified joint and survivor annuity (QJSA). For this purpose, a participant includes an individual beneficiary (e.g., an alternate payee) with an account under the plan.
Required Assumptions. The regulations set the assumptions that must be used for four relevant factors when converting an account balance into an income stream. First, it must be assumed that the benefit will commence on the last day of the statement period, and the participant will be age 67 (or the participant’s actual age, if older) on that date. Second, for purposes of the QJSA, it must be assumed that the participant is married; the spouse is the same age as the participant; and the survivor benefit is 100% of the monthly payment during the joint lives of the participant and spouse. Third, the interest rate for specified 10-year constant maturity Treasury securities must be used. Fourth, life expectancies must be determined using the Code § 417(e)(3)(B) unisex mortality table, which is generally used to calculate lump-sum distributions from defined benefit plans.
In-Plan Annuities. If a plan offers single life annuities and QJSAs as distribution options pursuant to a contract with a licensed insurer, the monthly payment amounts may be based on the actual contract terms so long as the required assumptions for commencement date, participant’s and spouse’s ages, and marital status are used.
Explanations. Pension benefit statements must provide an explanation of the lifetime income streams, including 11 required elements. Inserting model language into existing benefit statements or attaching the applicable supplement from the regulatory appendix will satisfy this requirement. When a participant purchases a deferred income annuity as a plan investment, different disclosure rules apply (and model explanatory language is not provided).
Limitation on Liability. Fiduciaries and others providing information about lifetime income streams are protected from ERISA liability so long as they use the required assumptions (or contract terms) and the model explanations (or language that is substantially similar in all material respects).
The DOL declined to request public comment before issuing the interim final regulations due to the SECURE Act’s requirement that regulations be issued within one year. However, the DOL took into account comments responding to a 2010 request for information and 2013 proposed regulations (see our Checkpoint article), and invites additional comments. The interim final regulations take effect one year after their publication in the Federal Register, but the preamble indicates that the DOL plans to adopt a final rule before that date.
EBIA Comment: Although the SECURE Act provided the statutory catalyst for the interim final regulations, the DOL has been considering the need for lifetime income disclosures for more than ten years. According to the DOL’s fact sheet, making lifetime income information available may help participants understand how prepared they are for retirement. Plan fiduciaries will likely welcome the liability relief, which may alleviate concerns over lawsuits if monthly retirement benefits fall short of pre-retirement illustrations. Because that relief is conditioned on adherence to the specified requirements, fiduciaries should study the regulations carefully. For more information, see EBIA’s 401(k) Plans manual at Sections XIII.H (“Forms of Distribution”), XIII.I (“Spousal Annuity Rules If Annuity Forms of Distribution Are Offered”), and XXVI.L.5 (“Quarterly Benefits Statements: Estimates of Lifetime Payments”).
Contributing Editors: EBIA Staff.