Twenty-five days. That’s how long until the Department of Labor’s Interim Final Rule pertaining to the new lifetime income illustrations for all ERISA-covered defined contribution plans required by the SECURE Act takes effect—and then the clock starts ticking on when the first lifetime income illustrations have to be included in statements sent to participants.
While the DOL is thought to be hard at work on a final regulation that could include changes based on commenter feedback and usurp the interim rule, there’s no guarantee that will happen before the interim rule is set to take effect on Sept. 18, 2021—or even by the end of the year. And if it does get done, it still has to be sent to the White House for review by the Office of Management and Budget, which could take several weeks. After that, the final rule would still need to be published in the Federal Register before taking effect.
So for now, plan sponsors are proceeding cautiously under the idea that the Interim Final Rule will take effect on Sept. 18—exactly one year after it was published in the Federal Register. The next benefit statement that is issued after that date must contain the required disclosures.
The new disclosure requirement applies to all ERISA-covered defined contribution plans, regardless of whether annuities are offered under the plan.
The lifetime income disclosure must provide two illustrations showing the monthly amount a participant or beneficiary would receive if his or her account balance was used to provide, first, a single life annuity and second, a joint and survivor annuity.
The monthly amounts illustrated are to be based on a participant’s current account balance and assume the payments were to start immediately—as if the participant were age 67 (or their actual age, if older).
Using the assumptions required under the rule, a $125,000 401k balance (with an interest rate of 1.83%) would translate into an estimated monthly payment, for life, of $645 for a single annuity, according to an example provided by the DOL. For a joint annuity, the person would get $533 per month until death, and then that amount would go to the surviving spouse.
FAQs provide some clarification
On July 26, 2021, the DOL issued a brief set of Frequently Asked Questions clarifying certain issues related to the Interim Final Rule. In that document, the DOL said it “intends to issue a final rule as soon as practicable based on feedback from comments received during the public comment period on the IFR.”
The FAQ also clarified that participant-directed plans (such as a 401k) that must issue quarterly statements under ERISA § 105(a)(1)(A)(i) can incorporate their first lifetime illustration on any quarterly statement up to the second calendar quarter of 2022 (ending June 30, 2022). The flexibility offered by ERISA § 105(a)(2)(B)(iii), however, would not permit a delay beyond the second calendar quarter of 2022, because the ending date of the third calendar quarter, Sept. 30, 2022, would be after the expiration of the 12-month period.
For non-participant-directed plans (certain profit-sharing plans), the lifetime income illustrations must be on the statement for the first plan year ending on or after September 19, 2021. For most such plans, this will be the statement for calendar year 2021, which would be furnished no later than the last date for timely filing of the annual return for that year for a calendar year plan (Oct. 15, 2022).
The new disclosures must be made once every 12 months. So long as they are made fully in accordance with the new regulation, plan sponsors, fiduciaries and others are shielded from liability arising out of such disclosures.
Use of TPA projections
A recent legal brief from Troutman Pepper pointed out that for a number of years, many 401k plans have provided various illustrations in participant benefit statements, calculated by the plan’s third-party administrator. These typically project the account balance to normal retirement age based on the framework set forth in the DOL’s 2013-published Advanced Notice of Proposed Rulemaking (ANPRM) or other illustrations differing from ANPRM.
“For example, the projections show a participant the amount he/she will have at retirement if he/she continues to contribute at the same rate. Lifetime income illustrations under the SECURE Act require illustrations based on the participant’s current account balance (as opposed to projecting it to normal retirement age). The FAQs clarify that plan administrators can provide additional illustrations to supplement (but not replace) those illustrations required by the SECURE Act,” the brief said.
Including such projections of higher future account balances (and therefore significantly higher monthly lifetime income from them) could alleviate some of the disappointment a participant could feel from seeing the small-by-comparison monthly amounts they would get out of their current nest egg. But at this point it is unclear whether doing so will be among changes included in the DOL’s eventual final rule.
Last fall, House Ways and Means Chair Richard Neal (D-MA) sent a letter to the Labor Department in response to the interim rule, asking that there be additional assumptions showing projected balances included in the mandatory disclosures.
“This information is critical for workers in planning for their retirement and studies have found that including this projection on 401k benefit statements has resulted in workers saving more for retirement,” Neal said in the letter.
“Projecting that employees’ 401k accounts will earn zero over 30 or 40 years was not the type of assumption Congress intended the Department to require,” Neal concluded. “I ask the Department to include a reasonable conservative earnings assumption in the final rule.”
If the DOL does adopt a new final rule, in the FAQ it noted that it understands the burdens and challenges associated with issuing a final rule that materially differs from the interim final rule without providing for transition relief for plan administrators to accommodate any such changes from the interim final rule.
This suggests the DOL may be accommodating to plan administrators if the final rule does indeed differ materially from the interim rule.
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