New Lifetime Income Illustrations Required This Year

By: Marc Purintun & Claire G. Pollock* 

The Setting Every Community Up for Retirement Act (the “SECURE Act”), passed at the end of 2019, adds a participant disclosure requirement that addresses a long-held concern of lawmakers that many participants are not sufficiently aware whether their defined contribution plan account balances would produce enough income at retirement.

To address this concern, the SECURE Act amended the Employee Retirement Income Security Act (ERISA) to require that administrators of ERISA-covered individual account defined contribution plans provide two “lifetime income illustrations” (the “Illustrations”) to participants at least annually to help participants understand how their account balance translates into monthly income.

Deadline for Disclosure

The disclosure requirement became effective September 18, 2021, and plan administrators are required to comply within 12 months. The Illustration can be provided as part of participants’ benefit statements that may be generated by a plan’s recordkeeper or other service provider.

• Participant-directed individual account plans that furnish quarterly benefit statements must incorporate the first Illustration on any quarterly statement up to the end of the second calendar quarter, ending June 30, 2022.
   
• For Individual account plans where the participant does not direct the investment of his or her account, the Illustration must be on the statement for the first plan year ending on or after September 18, 2021, which would be furnished no later than the last date for filing the annual return for that plan. For a calendar year plan, the deadline is October 15, 2022.

DOL Guidance

The Department of Labor (DOL) issued two sets of guidance with respect to this Illustration requirement.

• An Interim Final Rule and a summary of the interim rule were issued in August 2020 and became effective on September 18, 2021. 
   
• Frequently Asked Questions were issued on July 26, 2021, to respond to questions from practitioners.

The DOL is expected to issue final rules, but, in the meantime, plan administrators should be ready to comply with the disclosure requirement based on the current guidance.

Content of Illustrations

The Illustrations must show a participant’s account balance converted to a lifetime income equivalent – one as a single life annuity (SLA) and another as a qualified joint and survivor annuity (QJSA). The DOL provided model language and model notices in the Interim Final Rule that plan administrators can use in each of the required Illustrations. 

The Illustration must use certain assumptions to calculate the monthly payment Illustrations.

• Assumed commencement date: Monthly payment Illustrations must be calculated as if the payments begin on the last day of the benefit statement period. The Illustration will use this date even if the participant is not commencing benefits as of this date, because the Illustration is not projecting a balance that considers future contributions and investment returns.
   
• Assumed age: The Illustration will assume that the participant is age 67 on the assumed commencement, which is the Social Security full retirement age for most workers, or the participant’s actual age, if older than 67.
   
• Assumed spousal and survivor benefits:
  • The Illustration must show benefit payments as a Single Life Annuity, which will pay a fixed monthly amount for the life of the participant, with no survivor benefit after the participant’s death.
     
  • The Illustration must also show benefit payments as a Qualified Joint and 100% Survivor Annuity, which will pay a fixed monthly amount for the life of the participant, and the same fixed monthly amount to the surviving spouse after the participant’s death. The Illustration will assume that all participants have a spouse of the same age.
     
• Assumed interest rate: The Illustration must use the 10-year constant maturity Treasury rate (10-year CMT) as of the first business day of the last month of the statement period to calculate the monthly payments. The 10-year CMT approximates the rate used by the insurance industry to price immediate annuities.
   
• Assumed mortality: The Illustration must use the gender-neutral mortality table in section 417(e)(3)(B) of the Internal Revenue Code, which is the mortality table generally used to determine lump sum cash-outs from defined benefit plans.

Fiduciary Protection

Plan fiduciaries and plan sponsors are relieved of liability as a result of providing the Illustrations, protecting them from litigation from participants, provided the Illustrations use the assumptions described above and the statement uses language substantially similar to the model language provided by the DOL.

For more information on this new disclosure requirement, please contact Marc Purintun at 804.420.6310 or mpurintun@williamsmullen.com.

*Non-attorney professional