Disclosure Required: Lifetime Income Estimates on Defined Contribution Plan Benefit Statements

Full Disclosure Required: Lifetime Income Estimates on Defined Contribution Plan Benefit Statements

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The US Department of Labor (DOL) unveiled an interim final rule (the “Lifetime Income Disclosure Rule”) that adds a new lifetime income disclosure requirement for administrators of defined contribution plans (e.g., plans covered by Internal Revenue Code (Code) section 401(k) or Code section 403(b), profit-sharing plans and employee stock ownership plans). The Lifetime Income Disclosure Rule implements the provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act)—passed by Congress at the end of 2019—which require that defined contribution plan administrators include an estimated lifetime income stream of payments on the periodic participant benefit statements. For plans that are otherwise required to issue quarterly benefit statements, the Lifetime Income Disclosure Rule is clear that the lifetime income estimates may be provided on an annual basis.

In Depth

Under the Lifetime Income Disclosure Rule—which is currently scheduled to become effective on September 18, 2021—a plan administrator must provide each defined contribution plan participant with an annual estimate of their retirement savings illustrated as both: (a) a single life income stream, and (b) a separate income stream that factors in a survivor benefit (a Qualified Joint & Survivor Annuity or QJSA). This disclosure requirement applies regardless of whether the defined contribution plan actually offers an annuity form of payment. Further, the QJSA illustration is required regardless of whether the participant is married on the statement date.

The rule contemplates that lifetime income illustrations will be disclosed to participants as part of their periodic benefit statement, and will include an explanation of the assumptions used to generate the illustration. The Lifetime Income Disclosure Rule includes model disclosure language and lists several key assumptions:

  • That periodic payment amounts shown are solely for purposes of illustration and are not guaranteed.
  • That the annuity commencement date is the last day of the benefit statement period. For example, if the benefit statement covers the period ending on December 31, 2025, the assumed annuity commencement date is December 31, 2025.
  • That the participant is 100% vested in their account (regardless of the participant’s current vested percentage).
  • That a participant’s account balance includes the outstanding balance of any loan (assuming that the loan will be repaid).
  • That interest rates fluctuate based on market conditions and may affect a participant’s monthly benefit amount.
  • That the participant is at least age 67 on the commencement date, regardless of the participant’s actual age. If a participant is older than age 67, the plan administrator must use the participant’s actual age as of the last day of the statement period.
  • For purposes of the QJSA illustration, that a participant is married to a spouse that is the same age as them (regardless of the actual age of any spouse).
  • For the QJSA illustration, that the survivor annuity percentage is equal to 100% of the monthly payment that is payable during the joint lives of the participant and spouse.

The Lifetime Income Disclosure Rule also includes special assumptions and model disclosure language for plans that offer an in-plan annuity option. For example, if the plan offers an in-plan annuity option, the plan administrator may base the required lifetime income disclosures on the actual assumptions used by the in-plan annuity contract (within certain limitations), as opposed to the assumptions set forth by the DOL.

To address the fiduciary risk inherent in providing a lifetime income illustration, the Lifetime Income Disclosure Rule includes provisions for relief from fiduciary liability under the Employee Retirement Income Security Act of 1974 (ERISA) so long as plan administrators draft all lifetime retirement savings illustrations using the model disclosure language contained in the Lifetime Income Disclosure Rule or language that is “substantially similar in all material respects” to the DOL’s model language.

The comment period for the Lifetime Income Disclosure Rule ended on November 17, 2020. McDermott’s ERISA practice will closely monitor the Lifetime Income Disclosure Rule and provide additional guidance as it becomes available. The DOL has stated that it intends to issue a final rule in advance of the proposed September 18, 2021, effective date.