LIFETIME INCOME DISCLOSURES – Statement changes coming

On September 18, 2020 the U.S. Department of Labor (DOL) published an interim final rule under the Setting Every Community Up for Retirement Enhancement (SECURE) Act that would require 401(k) plan sponsors to annually disclose lifetime income estimates to plan participants.  The annual disclosure is designed to give participants a realistic picture of how much monthly retirement income they could expect to purchase as an annuity with their current account balance.  

Annual Disclosure of Projected Income

Under the rule, plan administrators must show participant retirement savings as monthly income under two scenarios: as a single-life income stream, and as an income stream that factors in a survivor benefit.

The estimates must explain what the lifetime income examples mean and the assumptions that were used to calculate them. Among others, plan administrators are instructed to follow these assumptions:

• Assume that the lifetime income begins as of the last day of the statement period.
• Assume that participants are age 67 (or actual age, if older) on the statement date.
• Assume participants are married, and their spouse is the same age.
• Use an interest rate equal to the 10-year constant maturity Treasury securities yield rate to approximate the rate used by the insurance industry to price immediate annuities.

Further, according to the DOL, plan fiduciaries that use the regulatory assumptions and the model language prescribed by the new rule will not be held liable if participants are ultimately unable to purchase equivalent monthly payments. 

Importantly, although the lifetime income illustrations are required to show the form of payment as annuities, neither the SECURE Act nor the interim final rule requires defined contribution plans to offer an annuity distribution option.

Effective Date

The rule takes effect on Sept. 18, 2021, and will apply to plan statements furnished to participants after that date.