Lifetime Income Illustrations
Art by Tim Bower
ADVISER QUESTION: I’m an RIA [registered investment adviser] who advises 401(k) plan committees. I know that the SECURE [Setting Every Community Up for Retirement Enhancement] Act included a requirement that 401(k) plans provide participants with annual lifetime income illustrations. When does that rule apply, and what should I be telling plan committees about that obligation?
ANSWER: The first of the annual lifetime income illustrations must be provided in participant benefit statements beginning after this September 18. We suspect that many plans will provide them in this year’s December 31 statements. There are a number of considerations that you should highlight to plan committees, including whether additional services are required to help participants understand the illustrations and apply them to their specific circumstances. You may be able to assist with some of those services.
Under the Employee Retirement Income Security Act (ERISA), the plan administrator—in most cases, a plan committee—has the fiduciary obligation to provide participant benefit statements that contain the lifetime income illustrations. But, as a practical matter, the plan recordkeeper or other service provider will usually develop and deliver the illustrations to participants as part of their statements. In that case, the plan committee’s role will be to review the illustrations to make sure they comply with the rules.
The Department of Labor (DOL) guidance, which is in an interim final regulation, describes how the illustration must be calculated in order for the plan committee, as the fiduciary administrator, to be protected, under the safe harbor, against a claim that the illustrations were inaccurate. The illustration must show the value of the participant’s account balance as of the last day of the statement period. That account balance must be expressed as a lifetime stream commencing on the last day of the statement period as follows: as a single life annuity—i.e., equal monthly payments for the life of the participant; and as a joint and survivor annuity—i.e., equal monthly payments for the joint lives of the participant and spouse.
The regulation describes the interest rate, life expectancy and other assumptions that need to be used for these illustrations. For instance, the participant is assumed to be age 67; if he is older than 67, then his actual age must be used. Also, a participant is assumed to be married to a spouse of the same age, and the survivor annuity percentage is assumed to be equal to 100%—i.e., the spouse would receive the same amounts as the participant. The assumptions must be explained in an understandable manner on the participant statement. For the sponsor to be protected under the safe harbor, it must use the model language contained in the regulation to explain the assumptions.
The regulation does not prevent a plan from providing additional lifetime income illustrations on the statement as long as they are not misleading to participants. However, such illustrations will not qualify for liability relief under the safe harbor. Therefore, if additional illustrations will be presented, the committee should use an experienced service provider to develop projections based on reasonable assumptions.
Committees should consider the impact of the mandated illustrations on participants and ways by which the plan can support participant needs. These include:
Participant education. Participants need to understand the illustrations and the assumptions used. The illustrations may be particularly confusing to young participants—e.g., a 30-year-old who is assumed to be 67 on December 31, 2021. In addition, participants need to understand how the illustrations can be affected by factors such as market conditions and future contributions.
Expanded plan distribution options. A committee could consider changes that offer retirees more flexibility in meeting their retirement needs. For instance, a plan could offer distribution options that include systematic withdrawal payments and special distributions for unexpected needs.
Gap analysis services. There are benchmarks and tools that can calculate whether a “typical” participant is projected to meet his retirement income requirements. These services can provide a gap analysis that evaluates the participant’s current retirement savings and suggests a strategy to put the individual on course for a secure retirement.
In your role as adviser, you can discuss these issues and additional services with your committees. You may be able to provide some services directly—e.g., educating participants about the projections—or, alternatively, help the committees select an outside provider to perform those services.
Fred Reish is chairman of the financial services ERISA practice at law firm Faegre Drinker Biddle & Reath LLP. Joan Neri, a nationally recognized expert in employee benefits law, is counsel in the firm’s financial services ERISA practice, where she focuses on all aspects of ERISA compliance affecting registered investment advisers and other plan service providers.