DOL Releases Interim Final Rule on Lifetime Income Disclosures

The U.S. Department of Labor (DOL) has released their Interim Final Rule in response to the SECURE Act’s requirement that administrators of defined contribution plans (such as 401(k) plans) provide participants with disclosures regarding estimated lifetime income payments.

The SECURE Act amended the pension benefit statement rules under ERISA section 105 to include a lifetime income disclosure to at least one benefit statement provided to participants during a 12-month period.  The new lifetime income disclosure must express a participant’s current account balance as a lifetime income stream.

The idea behind the change is to encourage participants to think about their retirement plan savings in terms of the monthly income it could provide and not just the total balance.  

Participants can expect to see the estimated lifetime stream of payments in two different scenarios.  One as a single life income stream (single life annuity), and the second as an income stream that factors in a survivor benefit (joint and survivor annuity).  The survivor benefit will be provided on the statement whether a participant is married or not.  The assumed age of the spouse will be the same age as the participant.

The income stream assumes that the participant is age 67 (unless the participant’s actual age is older than that), and that payments begin on the last day of the statement benefit period.   For example, if a participant has an account balance of $250,000 on December 31, the payments will be based on that amount, and assumes that they are age 67.  (The participant may in fact be younger than that and have a number of saving years ahead.) The assumed interest rate used will be the 10-Year Treasury Constant Maturity Rate on the first day of business of the last month of the statement period.  The gender neutral mortality table under section 417(e)(3)(B) of the IRC will be used to determine a participant’s life expectancy.

Participants can expect to see an explanation of how the estimated payments were calculated on their statements.  It will also be noted that the estimated payments are for illustrative purposes only and are not guarantees.  Plan sponsors and fiduciaries will not be held liable under ERISA for income illustrations as long as they follow Interim Final Rule’s model language and assumptions.

The Interim Rule has been submitted to the Office of the Federal Register and will go into effect 12 months after the date of its publication. Written comments on the rule will be accepted for 60 days after the date of publication.

Resources:

“Lifetime Income,” DOL.gov, August 5, 2020, (Source)