- Under the IFR, plan administrators will be required to illustrate a participant’s current account balance as a lifetime monthly income stream under two scenarios: first, as a single life annuity (SLA) and second, as a qualified joint and survivor annuity (QJSA), regardless of marital status.
- These illustrations can either be integrated into a participant’s pension benefit statement required under section 105 of ERISA or may be contained in a separate disclosure.
- To assist plan administrators, the IFR provides model language which administrators may use to explain to participants what the lifetime income illustrations mean and the assumptions used to calculate the illustrations. By using the model language (or substantially similar language), plan administrators will receive liability protection.
The U.S. Department of Labor (DOL) issued an Interim Final Rule (IFR) on August 18, 2020, implementing Section 203 of the SECURE Act, which requires that plan administrators of ERISA-covered defined contribution plans provide participants with two lifetime income illustrations (LII) of their account balance at least once per year. As part of the IFR, the DOL also published a Fact Sheet.
Interim final rules are generally used when providing a notice and comment period is unnecessary. However, the DOL requests comments from the public on the IFR and will consider these comments when issuing the final rule. The IFR will be effective 12 months after the date of its publication in the Federal Register; that date has not been announced.
Section 105 of ERISA requires plan administrators to provide participants with periodic pension benefit statements at least annually (quarterly for participant-directed plans). Benefit statements are required to indicate the participant’s total benefits accrued (i.e., the participant’s account balance) based on the plan’s latest information. In December 2019, Congress passed the SECURE Act, which amended section 105 of ERISA to require plan administrators to include two illustrations of a participant’s account balance converted to a lifetime income equivalent—one as a single life annuity (SLA) and one as a qualified joint and survivor annuity (QJSA)—at least once every 12 months. The SECURE Act also required the DOL to prescribe the actuarial assumptions necessary for plan administrators to convert account balances into an SLA and a QJSA.
Who Receives the LII statement?
The annual LII statement must be provided to any participant with an account balance under the plan, including beneficiaries of deceased participants, and alternate payees with plan account balances pursuant to a qualified domestic relations order.
The LII benefit statement must be provided by the plan’s administrator. Non-ERISA plans are not required to provide the statements to participants but could do so.
The LII may be integrated into the regular pension benefit statement required under section 105 of ERISA and using model language from the IFR, or they may be contained in a separate disclosure using the model statement DOL included in the IFR.
The LII must include the following pieces of information:
- Plan administrators must calculate the monthly payment illustrations as if the participant is fully vested in his or her account balance. To the extent that the account contains unvested amounts, the account balance must nonetheless treat the participant as being 100 percent vested. Outstanding plan loan balances must also be included in the account balance, unless the loan is in default.
- The value of the participant’s account balance as of the last day of the statement period, with certain exclusions.
- The account balance illustrated as an equivalent lifetime income stream payable in equal monthly payments for the life of the participant (i.e., a single life annuity or SLA).
- The account balance illustrated as an equivalent lifetime income stream payable in equal monthly payments for the joint lives of the participant and spouse (i.e., a qualified joint and survivor annuity or QJSA), even if the participant is unmarried.
Assumptions for Annuities
Under the IFR, plan administrators are required to provide lifetime income illustrations using these prescribed assumptions:
- Immediate benefit commencement. Calculations must assume that the benefit payments will begin on the last day of the benefit statement period.
- Assumed age of 67. Calculations must assume that the participant is age 67, or the participant’s actual age, if older than 67.
- Future earnings, contributions, and deferred income annuity amounts excluded. The preamble explains that the DOL chose to adopt an “immediate annuity” approach whereby participants could assume a static account balance that serves as an “immediate benchmark” because it shows the size of monthly payments to expect if there were no further savings, gains, or losses between the statement date and retirement. The DOL further explained that this simplified approach would easily permit younger participants to create their own projection of a different account balance by: (1) dividing the projected estimated account balance by the current account balance and then (2) multiplying the result by the monthly payment amount on the statement.
- Inflation protection excluded. The IFR requires an explanation that monthly payments in the illustrations are fixed and do not increase for inflation. However, commenters are invited to address whether, in lieu of a fixed nominal annuitized income stream, the final rule should require an illustration of monthly payments that increase with inflation.
- Marital Status and Amount of Survivor’s Benefit. For the QJSA illustration, plans will assume the participant is married to a spouse of the same age and that the elected survivor percentage is 100 percent.
- 10-year constant maturity Treasury rate (10-year CMT). Plans must use the 10-year CMT as of the first business day of the last month of the statement period to convert the account balance into an SLA and a QJSA.
- Mortality table. The IFR requires that plans use the gender neutral mortality table under section 417(e)(3)(B) of the Internal Revenue Code. This mortality table is generally used to determine lump sum payments from defined benefit pension plans. The latest versions of the table are found in IRS Notice 2019-26 (for 2020), and Notice 2019-67 (for 2021).
- Term certain and other features. The SECURE Act gave the DOL discretion to prescribe special rules and assumptions for lifetime income streams with “a term certain or other feature,” but the basic SLA and QJSA illustrations do not include these special features.
To assist plan administrators, the IFR provides model language that administrators may use to explain the LII and the assumptions used to calculate lifetime income. The IFR includes two model LII statements that incorporate the model language for each of these required explanations: one for plans that do not offer annuities and one for plans that offer annuities. By using the model language or substantially similar language to the model language, plan administrators will receive liability protection (see below).
Plans That Offer Other Annuities
The IFR also contains special rules for plans that offer in-plan distribution annuities through an insurer and for plans that allow participants to purchase deferred income annuities that pay a specified dollar amount at retirement.
Plan administrators may include LIIs on the benefit statement in addition to the illustrations required by the IFR, as long as such additional illustrations are clearly explained, presented in a manner that is designed to avoid confusing or misleading participants, and based on reasonable assumptions. However, these additional illustrations are not entitled to liability relief (see below).
Plan fiduciaries (as well as plan sponsors and other persons) that use the regulatory assumptions and the model language or model LII statement provided in the IFR will qualify for liability relief and will not be held liable if participants are unable to purchase equivalent monthly payments when they elect to receive their benefits under a plan that provided such illustrations.
While the illustrations are intended to provide a realistic picture of the lifetime income participants can expect in retirement, some plan administrators and service providers may view these illustrations as inadequate because they are static and do not take into account future earnings or contributions, may not reflect actual market conditions, and are not designed to be an interactive tool for participants. Notwithstanding any perceived shortfalls, this information may still be helpful to participants in understanding what steps they might take in order to improve their retirement security.
Plan administrators will want to carefully review the IFR to understand their new disclosure obligations and how the rule may impact the content of participant pension benefit statements.
Attorneys in Ballard Spahr’s Employee Benefits and Executive Compensation Group are available to assist plan administrators and service providers as they navigate the complex and nuanced requirements of the IFR.
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