The Department of Labor (DOL) recently published an interim final rule requiring plan administrators of individual account plans, such as 401(k) plans and 403(b) plans, to illustrate a participant’s current account balance as both a single life annuity and a qualified joint and survivor annuity payment.

The new disclosures created by the SECURE Act are designed to provide additional information to participants to better understand how the amount of money they saved can be converted to an estimated monthly payment for the rest of their lives.

The regulations create an approach to provide for an estimate of the value of benefits as an annuity tied to hypothetical assumptions involving the participant’s age, start date, and the survivor annuity percentage. This approach is beneficial from an administrative perspective, as it minimizes the participant-specific data that must be taken into account.

The lifetime income illustrations must be furnished to participants at least annually within one of the quarterly statements for the year. The DOL guidance provides for a suggested presentation for the illustrations, and a listing of standard assumptions that must be used to convert a participant’s account balance to a lifetime income stream and a model notice that may be used for benefit statements to explain the assumptions and obtain relief from liability for the illustrations.

Overview

• Presentation – At least annually, the pension benefit statements must include the value of a participant’s balance as of the last day of the statement period. Such balance must be expressed as a lifetime income stream payable in equal monthly installments for (a) the life of the participant (single life annuity) and (b) the joint lives of the participant and spouse (a qualified joint and survivor annuity (QJSA)). The DOL provided an example of the anticipated format. There is also a listing of standard assumptions that must be used to convert a participant’s account balance to a lifetime income stream (commencement date and age, marital status, survivor annuity percentage, interest rate, and mortality) and substitute assumptions for annuity contracts. A model notice may be used for benefit statements to explain the assumptions and obtain relief from liability for the illustrations.

• Starting Date – The annuity commencement date in the illustrations is assumed to be the last day of the statement period. For example, if the benefit statement covers the period ending on December 31, 2026, the assumed annuity commencement date would be that same date—December 31, 2026.

• Commencement Age – The illustrations must assume the participant is age 67 on the commencement date, without regard to the participant’s actual age. If the participant is older than 67, then the participant’s actual age as of the last day of the statement period must be used instead.

• Marital Status – For purposes of converting a participant’s account balance to a QJSA, the illustrations assume the participant is married and the participant’s spouse is the same age as the participant. This applies even if a participant is not married at the time the pension benefit statement is furnished, as the illustrations must reflect monthly payments under both a single life annuity and a QJSA.

• Interest Rate – The guidance contains an interest rate assumption that must be used in preparing the lifetime income illustrations. Plan administrators may assume a rate equal to the 10-year constant maturity Treasury securities yield rate for the first business day of the last month of the period to which the benefit statement relates (Note: this rate is published daily by the U.S. Department of the Treasury).

• Mortality – The guidance requires that plan administrators covert a participant’s account balance assuming mortality, as reflected in the unisex mortality table published by the IRS.

The guidance also contains assumptions for plans with annuities through an insurance company. For example, some defined contribution plans offer distributions in the form of an annuity under an insurance contract held by the plan. In this case, a special rule allows plan administrators to base the two income illustrations on the terms of the insurance contract, instead of using the standard assumptions.

The special rule is optional. The regulations provide that the illustrations must still assume the first payment is made on the last day of the statement period, treat the participant as age 67 (unless older) on such date, and assume the participant has a spouse the same age.

Beyond these limitations, however, plan administrators may substitute actual contract terms for other standard assumptions such as the interest rate and the mortality experience. Plan administrators may also reflect the survivor’s benefit percentage specified in the contract, if less than 100%.

The SECURE Act requires the DOL issue a model lifetime income disclosure that explains a variety of topics, including the assumptions on which the lifetime stream was determined.

The notice also provides that no plan fiduciary, plan sponsor, or other person shall have any liability solely by reason of providing the lifetime income stream equivalents prescribed by the DOL rules. As such, the use of the model language is required for relief from liability. Plan administrators do have flexibility as to how they incorporate the model language, such as including it within the benefits statement or provided as a supplemental attachment.

Effective Date

The interim final rule will be effective on the date that is 12 months after the date of publication in the Federal Register. For example, if these rules were published in the Federal Register on December 1, 2020, then the rule becomes effective on December 1, 2021 and plans must incorporate the initial lifetime income disclosures at least annually thereafter.

It is important to note that the DOL intends to issue a final rule that takes into account any comments that it receives on the interim final rule before the interim final rule becomes effective. Any changes in the final rule would supersede the requirements of the interim final rule.

Elliot Dinkin is president and CEO at Cowden Associates, Inc., specializing in helping corporate clients find the best solutions, both for the enterprise and its employees, with regard to compensation, healthcare benefits, retirement and pension issues, and Taft-Hartley fund consulting.