DOL Clarifies Timing of 401(k) Lifetime Income Disclosures

In a new set of frequently asked questions (FAQs), the U.S. Department of Labor (DOL) answers four key questions regarding a new 401(k) requirement to provide lifetime income estimates to participants based on the present dollar value of their accounts.

The temporary implementing FAQs, posted by the DOL's Employee Benefit Security Administration (EBSA) on July 26, clarify points not addressed when the DOL issued an interim final rule on lifetime income statements last Sept. 18. 

The rule implements a provision of the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, which requires 401(k) and similar defined contribution workplace retirement plans to provide income estimates—referred to as "lifetime income illustrations"—to participants, giving savers "a realistic illustration of how much monthly retirement income they could expect to purchase with their account balance," according to the rule.

Under the interim final rule, sponsors of 401(k) and similar plans must annually disclose to plan participants an estimate of the monthly amount that their account balance would pay in the form of:

• A life annuity with equal payments over the participant's lifetime.
  

• A qualified joint and 100 percent survivor annuity with equal payments over the joint lives of the participants and a spouse.
  

These estimates are calculated as if the lifetime income payments were to began on the last day of the statement period, and as if the participant is 67 years old at that date—unless the participant is older than age 67, in which case his or her actual age should be used.

The participant-disclosure requirement takes effect on Sept. 18, 2021, and applies to retirement plan statements sent to participants (typically on a quarterly basis) after that date.

The disclosure is intended to help employees determine their readiness to retire. It also is expected to encourage employees to consider annuitization of their retirement assets, meaning using some or all of their 401(k) funds to purchase a lifetime annuity. A lifetime income annuity is a contract with an insurance company that allows purchasers to convert a portion of their retirement savings into a predictable lifetime income stream.

"Plan sponsors should work with their record keepers to formulate a plan for compliance," advised Sam Henson, director of legislative and regulatory affairs, retirement services, at Lockton, a benefits brokerage and consulting firm.

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Four Questions Answered

The interim final rule solicited comments on the regulation, and the FAQs address four questions that commenters raised.

Question 1. 

For participant-directed plans, what is the effective date of the interim final rule and the earliest statement for which the lifetime income illustrations are required content?

"Because plans must furnish the lifetime income illustrations at least annually, plans that issue quarterly statements must first comply with the [interim final rule] on a benefit statement for a quarter ending within 12 months after the effective date," the FAQs state.

Plans that furnish participants with quarterly benefit statements must include the participant's lifetime income illustration "on only one [retirement plan] benefit statement in any 12-month period," noted the American Society of Pension Practitioners and Actuaries (ASPPA), a professional association. "For these plans, the lifetime income illustration can't be delayed "beyond the second calendar quarter of 2022, because the ending date of the third calendar quarter—Sept. 30, 2022—would be after the expiration of the 12-month period," ASPPA noted.

Question 2. 

For non-participant-directed plans, what is the earliest statement for which the lifetime income illustrations are required content?

For plans under which participants or beneficiaries have their own account but do not have the right to direct the investment of assets in that account, the lifetime income illustrations "must be on the statement for the first plan year ending on or after Sept. 19, 2021," the FAQs state. "For most such plans, this will be the statement for calendar year 2021."

Question 3.

Our plan's third-party administrator currently projects participants' account balances to normal retirement age, e.g., age 65, based on the framework the DOL published in its Advance Notice of Proposed Rulemaking in 2013. Will that approach fulfill our obligations under the interim final rule?

"The interim final rule specifically allows for additional lifetime income illustrations," the FAQs clarify. This permission was based on the DOL's recognition that many retirement plans have been providing various types of illustrations for several years.

"Many plans … have been including some form of information in participants' statements that reflects how their balances translate into the ability to be 'on track' to retire," Henson pointed out. "Many of these resources are very sophisticated, comprehensive and well-received by participants."

The FAQs, like the interim final rule, only require lifetime income estimates based on a plan participant's savings to date. Kerry Pechter, editor and publisher of Retirement Income Journal, thinks the DOL's approach is too limited. He called lifetime income estimates that are based on annuitizing current 401(k) account values "a fairly useless number," adding, "It won't help participants project the amount of savings they might accumulate by the time they retire if they keep saving at the current rate, or how much they might be able to generate from those savings."

While the FAQs do not indicate that the DOL/EBSA will add such a requirement in the final rule, the FAQs clarify that plan sponsors aren't prevented from expanding on the required income disclosure.

"The FAQs clarify that plans can provide participants with multiple [lifetime income illustrations (LIIs)]," according to Groom Law Group in Washington, D.C. "This clarification may be helpful for plans that want to deliver various LIIs that, for example, take future contributions or in-plan annuity options into account," the firm noted. "However, DOL has not extended the SECURE Act's fiduciary safe harbor for LIIs to any LIIs other than those meeting the requirements" of the interim final rule.

[Related SHRM article: Expert Q&A: Can 401(k) Plans Provide Lifetime Income Payments?]

Transition Relief

Question 4. 

The DOL stated in the preamble to the interim final rule that it intended to adopt a final rule sufficiently in advance of the effective date. Will the final rule provide some transition relief if the final rule is not issued significantly in advance of Sept. 18, 2021?

EBSA answered that it intends to issue a final rule "as soon as practicable" based on feedback from comments that were received through November 2020, during the public comment period on the interim final rule. "We appreciate the commenters' concerns about the burdens and challenges that could arise if the Department issues a final rule that differs materially from the [interim final rule] without sufficient transition time for plan administrators to accommodate any changes," the FAQs state.

Noted ASPPA: "The FAQs seemed a bit more noncommittal with respect to whether the EBSA would provide transition relief if a final rule were not issued significantly in advance of Sept. 18, 2021, effective date."