Revisiting the SECURE Act’s Lifetime Income Disclosures

Way back in December of 2019, the SECURE Act was passed into law and made significant changes to retirement benefit plans. It is easy to forget about the SECURE Act after the CARES Act and seemingly endless flow of administrative guidance that has come out since the national emergency caused by the coronavirus pandemic. But the Department of Labor has brought the SECURE Act back to the main stage after it issued the interim final rule this week on lifetime income illustrations.

Section 105 of ERISA requires administrators to provide participants with periodic pension benefit statements. Defined contribution plans must issue these statements at least once each calendar year, or once each calendar quarter if the plan allows participants to direct their own investments in their individual accounts. The benefit statements must provide participants of defined contribution plans with their account balances, and now, due to an addition made by the SECURE Act, must provide lifetime income disclosures. The SECURE Act required the Department of Labor to provide administrative guidance on these disclosures, and right on time the interim final rule (the “IFR”) was issued.

The Department of Labor explains through the IFR that the lifetime income illustration’s purpose is to help participants better understand their retirement savings as a vehicle for income replacement during retirement. To achieve this goal, the lifetime income disclosure must provide illustrations of a participant’s account balance converted to a single life annuity and qualified joint and survivor annuity (QJSA). In addition to the illustrations, plan administrators must also provide various explanations about the estimated lifetime income payments.

The IFR provides model language that can be used for the required explanations, as well as assumptions plan administrators can use to calculate these illustrations, including assumptions for the participant’s commencement date and age, spousal and survivor benefits, interest rate, and assumed mortality. The IFR assumptions can be used by any defined contribution plan, regardless of whether a single life annuity or QJSA are offered under the terms of the plan. Lastly, plans that offer in-plan distribution annuities through a contract with a licensed insurer also have the option to base the lifetime income illustrations on the actual terms of the plan’s insurance contracts.  However, the IFR only provides ERISA liability relief for providing a lifetime income illustration for plan fiduciaries that use both the IFR assumptions and the IFR’s model language.

The IFR will be effective 12 months after its publication in the Federal Register, but the EBSA intends to issue a final rule in advance of the IFR effective date. We will continue to provide updates on this issue as they become available. If you have questions on this of any other employee benefits topic, please contact one of Graydon’s Employee Benefits attorneys.

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