DOL releases “interim final rule” on lifetime income illustrations

On August 18, 2020, the Department of Labor released an “interim final rule with request for comments” on lifetime income illustrations, required by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).

In this article we review the rule and some of the issues it may raise.

The rule in brief

The rule would require DC plan sponsors to annually provide participants and beneficiaries with both a single and a qualified joint and 100% survivor lifetime income illustration showing the annuity their account balance would “buy:”

Assuming that the lifetime income begins as of the last day of the statement period. DOL gives the following example: “if the benefit statement covers the period ending on December 31, 2025, the assumed annuity commencement date would be December 31, 2025.”

Assuming that the participant is age 67 (or her actual age if older) on the statement date.

Assuming the participant is married, and his spouse is the same age.

Using an interest rate equal to the 10-year constant maturity Treasury securities yield rate.

Using unisex mortality assumptions under Internal Revenue Code section 417.

The participant’s account balance is her total account balance without regard to any vesting provision and includes outstanding loans that are not in default.

In-plan annuities. Plans with in-plan annuities may generally use assumptions under the in-plan annuity contract. But deferred annuities purchased by participants through the plan would be subtracted from the participant’s account for purposes of the lifetime income calculation and disclosed separately.

Model disclosure. The rule provides model disclosure language that may be integrated into a sponsor’s current benefit statement template, and a “Model Benefit Statement Supplement” that may (alternatively) simply be added to the current statement.

Limitation on liability. If the sponsor uses the provided model language, then “[n]o plan fiduciary, plan sponsor, or other person shall have any liability under [ERISA Title I] solely by reason of providing the lifetime income stream equivalents described in [the rule].”

Additional lifetime income illustrations. Sponsors may provide additional illustrations, e.g., pursuant to interactive software that take into account projected contributions and earnings. The liability limitation would not be available for these additional illustrations. DOL is, however, seeking comments on whether it should issue guidance “clarifying the circumstances under which the provision of additional illustrations … may constitute the rendering of ‘investment advice’ or may, instead, constitute the rendering of ‘investment education’ under ERISA.”

Effective date. The rule is effective one year from publication in the Federal Register.

Observations –

Interest rate assumption. The use of the 10-year Treasury rate is likely to provoke criticism as too low. DOL, in the preamble to the rule, argues that using it compensates for the absence of an “insurance load” in its assumptions. Critics are likely to argue that the 10-year Treasury rate is the wrong duration (life expectancy at age 67 is likely to be over 20 years), that it represents the wrong credit index (some sponsors are finding it is possible to settle liabilities at or near GAAP/corporate bond rates), and that the cash flows under a 10-year Treasury Note do not look like the cash flows under an annuity.

Assumption that the participant is age 67. While this assumption simplifies disclosure, most believe that a participant who is, e.g., age 40 will make some real return on her account balance over the next 27 years, which DOL’s assumption ignores. Thus, this assumption likely understates younger participants’ retirement income.

Need for relief with respect to non-model disclosures. DOL carving out a set of disclosures that are explicitly protected from ERISA fiduciary liability will (as DOL has anticipated) likely generate a call for clarification of the status of non-model lifetime income disclosures currently being made by plan sponsors.

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Since DOL began this project, in 2013, it has been controversial, and there are likely to be a number of comments suggesting significant changes. 

Comments are due 60 days after publication in the Federal Register.

We will continue to follow this issue.