Disclosure Required: Lifetime Income Estimates on Defined Contribution Benefit Statements | McDermott Will & Emery

The US Department of Labor (DOL) has unveiled an interim final rule (the “Lifetime Income Disclosure Rule”) that adds a new lifetime income disclosure requirement for administrators of defined contribution plans (for example, plans covered by Section 401 of the Internal Revenue Code (Code) (k) or Section 403 (b) of the Code, Incentive Plans and Employee Share Ownership Plans). The Lifetime Income Disclosure Rule implements provisions of the 2019 Setting Every Community Up for Retirement Enhancement (SECURE Act) – passed by Congress at the end of 2019 – that requires administrators of defined contribution plans include an estimated lifetime income stream from payments on periodic member benefit statements. For plans that are otherwise required to publish quarterly benefit statements, the lifetime income disclosure rule clearly states that lifetime income estimates can be provided on an annual basis.

Under the lifetime income disclosure rule, which is currently scheduled to come into effect on September 18, 2021, a plan administrator must provide each member of a defined contribution plan with an annual estimate of their retirement savings shown in both by: (a) a single lifetime income stream, and (b) a separate income stream that takes into account a survivor benefit (a qualifying spouse and survivor pension or QJSA). This disclosure requirement applies regardless of whether or not the defined contribution plan offers some form of annuity payment. In addition, QJSA illustration is required whether or not the member is married on the statement date.

The rule provides that lifetime income illustrations will be disclosed to plan members 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:

  • The periodic payment amounts shown are for illustration purposes only and are not guaranteed.
  • That the start date of the annuity is the last day of the benefit statement period. For example, if the benefit statement covers the period ending December 31, 2025, the assumed pension start date is December 31, 2025.
  • That the participant is 100% invested in his account (regardless of the participant’s current vesting percentage).
  • That a participant’s account balance include the outstanding balance of any loan (assuming the loan will be repaid).
  • That interest rates fluctuate with market conditions and may affect the amount of a member’s monthly benefit.
  • That the participant is at least 67 years old on the start date, regardless of their actual age. If a member is over 67, the plan administrator should use the member’s actual age on the last day of the statement period.
  • For the purposes of the QJSA illustration, a participant is married to a spouse who is the same age as them (regardless of the actual age of any spouse).
  • For the illustration of the QJSA, that the percentage of the survivor’s pension is equal to 100% of the monthly payment payable during the cohabitation of the participant and his spouse.

The lifetime income disclosure rule also includes special assumptions and model disclosure language for plans that offer an annuity option in the plan. For example, if the plan offers an annuity option in the plan, the plan administrator may base the required lifetime income information on the actual assumptions used by the annuity contract in the plan (within certain limits), as opposed to to the assumptions set out 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 Employees Retirement Income Security Act. 1974 (ERISA) as long as the plan administrators draft all life retirement savings illustrations using the model disclosure language contained in the Lifetime Income Disclosure Rule or language that is “substantially similar in all respects important ”to the DOL 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 said it intends to issue a final rule before the proposed effective date of September 18, 2021.

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