On August 18, 2020, the Department of Labor (“DOL”) announced new guidance on lifetime income disclosures that must be included in pension benefit statements furnished to participants in defined contribution plans, such as 401(k) and 403(b) plans. This guidance, issued in the form of an interim final rule, sets forth the rules that plan administrators must follow in implementing the lifetime income disclosure requirement that was added to ERISA by Section 203 of the 2019 SECURE Act.
- The disclosures required by the interim final rule must be provided starting one year after publication of the interim final rule in the Federal Register. (As of publication of this post, the rule has yet to be published in the Federal Register.)
- As used in the interim final rule (and this blog post), the term participant includes an beneficiary with a plan account, such as an alternate payee or the beneficiary of a deceased participant.
Pension Benefit Statement Requirement
Under Section 105 of ERISA, administrators of defined contribution plans are required to provide to each participant a pension benefit statement that includes the participant’s total accrued benefit (i.e., the account balance), the participant’s total vested benefit, and the most recent valuation of the assets in which the participant’s account is invested. For most defined contribution plans, this statement must be provided quarterly, although it can be provided annually instead if participants do not have the right to direct the investments in their accounts.
ERISA Sections 105(a)(2)(D)(ii) and (iii), which were added by Section 203 of the SECURE Act, require that no later than one year after enactment of the SECURE Act the DOL issue a model lifetime income disclosure and prescribe assumptions that plan administrators may use in converting total accrued benefits into a lifetime income stream. The interim final rule is intended to comply with these requirements.
- These are just some of the disclosure requirements applicable to defined contribution plans.
- Different requirements apply to defined benefit plans.
- Plan administrators should therefore consult Section 105 of ERISA to fully understand the information and disclosures that must be included in the pension benefit statements for their plans.
Interim Final Rule
Section 203 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) added to Section 105 of ERISA a requirement that defined contribution benefit statements include a lifetime income disclosure at least once during any 12-month period. The DOL’s interim final rule sets out rules for implementing the lifetime income disclosure, including the assumptions that plan administrators must rely upon in calculating these income streams.
- Form of Annuity. Consistent with Section 203 of the SECURE Act, the new guidance requires that plan administrators express the value of each participant’s account balance as a single life annuity (“SLA”) and as a qualified joint and survivor annuity (“QJSA”).
- Note: this requirement applies to all defined contribution plans that are subject to § 105 of ERISA, even though many defined contribution plans are not required to offer these forms of distribution.
- Commencement Date. In calculating each form of annuity, the rule requires that the annuity’s commencement date be calculated using the last day of the 12-month statement period for which the disclosure is being provided. For example, if the 12-month statement period ends on December 31, 2025, the assumed annuity commencement date will be December 31, 2025.
- Age. Under the new guidance, the annuity must be calculated assuming that the participant is age 67 on the commencement date, unless the participant is older, in which case the participant’s actual age must be used. Regarding this assumed age of 67, the DOL justified its decision by noting that “this age aligns with full or normal retirement age under Social Security” for most workers and therefore will provide workers with a clear picture of their potential future monthly retirement income. However, the DOL has acknowledged that no assumed age is perfect for purposes of calculating an annuity. The DOL has therefore requested comments on whether age 67 is the most appropriate assumed age and whether the final rule should instead require multiple assumed ages, noting that Social Security statements presently show monthly retirement income based on three assumed retirement ages (62, 67 and 70).
- Spousal Information. The annuities must be calculated as an SLA and a 100% QJSA even if the participant is not married at the time the benefit statement is furnished. For purposes of calculating the QJSA, plan administrators must assume that each participant has a spouse that is the same age as the participant. However, if the plan offers an SLA and QJSA, the plan may instead use the survivor annuity percentage of its QJSA, if less than 100%.
- Interest Rate. In calculating the annuities, plan administrators must assume an interest rate equal to the 10-year constant maturity Treasuries securities yield rate for the first business day of the last month of the period to which the benefit statement relates, unless the plan offers an SLA and QJSA. As an example, if the 12-month statement period ends on December 31, 2025, the interest rate must be the rate on December 1, 2025. The DOL has requested comments on whether this rate assumption is appropriate, or whether a different interest rate or combination of rates should be used instead. (If a plan offers an SLA and QJSA, the interim final rule permits the plan to use its own interest rate assumptions.)
- Mortality. To calculate the SLA and QJSA, the DOL has explained that these lifetime income streams must be calculated using the applicable mortality table under Section 417(e)(3)(B) of the Code. These mortality assumptions are typically used by defined benefit pension plans to determine lump-sum cash-outs. As noted by the DOL, this is a unisex table, which the department considers to be preferable for a number of administrative and legal reasons. The DOL has also requested comment on use of these mortality tables. If a plan offers an SLA and QJSA, it may instead use its own mortality assumptions rather than the mortality tables under Code Section 417(e)(3)(B).
- Plan Loans. The Plan must include the outstanding balance of any participant loan(s) in calculating the annuities, unless the loan is in default when the calculation is made.
- Model Language. To assist participants in understanding the lifetime income information provided, the interim final rule also requires that administrators explain the underlying assumptions used to calculate the SLA and QJSA. To satisfy this requirement, the rule includes model language that may be used. This model language has been provided both separately in the body of the rule as well as in the form of a Model Benefit Statement Supplement, which is attached as Appendix I to the rule.
- Fiduciary Protection. As provided in Section 105(a)(2)(D)(iv) of ERISA, the interim final rule provides that no plan fiduciary, plan sponsor, or other person will have liability under Title I of ERISA as a result of providing the lifetime income stream information, so long as the SLA and QJSA are calculated in accordance with the rule and the benefit statement includes explanatory language substantially similar to the DOL’s model language.
The interim final rule, which has yet to be published in the Federal Register, provides that it will go into effect one year after the date of publication, and will be applicable to pension benefit statements furnished after that date. The rule also states that written comments must be received within 60 days after publication. Additional information, including instructions for submitting comments, can be found here.