The Department of Labor’s Employee Benefits Security Administration (EBSA) issued on August 18 an interim final rule (IFR) requiring administrators of defined contribution retirement plans—e.g., 401(k) plans—to include two lifetime income estimates on participants’ pension benefit statement at least once every 12 months. The IFR takes effect one year after its publication in the Federal Register.
The IFR implements Section 203 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted on December 17, 2019, and takes effect one year after its publication in the Federal Register. It is intended to “give savers a realistic illustration of how much monthly retirement income they could expect to purchase with their account balance” and to help them determine whether they are well prepared for retirement.
The IFR is also meant as an encouragement, not a requirement, for participants to annuitize their retirement assets (i.e., using a portion of or their entire 401(k) savings to purchase a lifetime annuity, which is a contract with an insurance company that lets them convert a portion of their retirement savings into a fixed lifetime income stream.
The IFR specifies the following assumptions for plan administrators to use in calculating the monthly payment illustrations of each participant’s account balance as a single life annuity (SLA) and a qualified joint and survivor annuity (QJSA):
Assumed commencement date. This is the date when the annuity payments begin. It requires the calculation of monthly payment illustrations on the assumption that the payments begin on the last day of the benefit statement period.
Assumed age. This refers to the participant’s age on the annuity start date. The participant’s age on the supposed commencement date must be assumed to be either 67 (the Social Security full retirement age for most workers) or the participant’s actual age, if older than 67.
Assumed spousal and survivor benefits. This determines the following:
Assumed interest rate. Calculation of monthly payments requires plan administrators to use the 10-year constant maturity Treasury (CMT) rate as of the first business day of the last month of the statement period. The 10-year CMT approximates the rate used by the insurance industry to price immediate annuities.
Assumed mortality. To determine life expectancy, plan administrators must use the gender neutral mortality table in section 417(e)(3)(B) of the Internal Revenue Code—the mortality table generally used to determine lump sum cash-outs from defined benefit plans—which is consistent with Arizona Governing Comm. for Tax Deferred Annuity and Deferred Compensation Plans v. Norris, 463 U.S. 1073 (1983).
The IFR requires plan administrators to provide participants with various explanations about the estimated lifetime income payments—for one, to help participants understand how their estimated monthly payments were calculated and to help them see that these estimates are purely illustrative and not guarantees.
The IFR provides model language that may be used for each of the required explanations, giving plan administrators flexibility with separately integrating the model language into their existing pension benefit statements without altering the existing format and presentation.
Alternatively, plan administrators may instead use one of the two Model Benefit Statement Supplements found in the Appendices to the IFR if they prefer to include the explanations as more of an addendum.
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