Safe Harbor is Topic of Lifetime Income Comments

The DOL’s Advance Notice of Proposed Rulemaking (ANPRM) has been seeking feedback about a proposed regulation to require plan sponsors to include lifetime income illustrations with plan participants’ benefit statements. Some of the common denominators of these comments are online calculators and safe harbor language.

Online Calculators

“The DOL online calculator should be enhanced and its use, or the use of a private service provider online calculator, should be encouraged so participants can individualize the assumptions used to calculate potential lifetime income distribution streams,” said Craig P. Hoffman, general counsel and director of Regulatory Affairs for American Society of Pension Professionals & Actuaries (ASPPA).

Hoffman added, “The estimation of future earnings is inherently a guessing game when applied to individual participants. The benefit statement can counter that flaw by using a range of three possible nominal rates of investment return. The online calculator can do that even more effectively by allowing the individual to input a much broader range of investment return assumptions. It should also allow for individuals to include a projection for future employee and employer contributions.”

“We believe that the separate purposes are served by the statement illustration and the Web planning tools and that both are important,” said Charles P. Nelson, president, Retirement Services, Great-West Financial. “We believe that the ANPRM, which focuses on statement illustrations, should be designed to provide illustrations that are simple and easy to understand, cost-efficient and relatively standard across plans and employers. We believe further that the statement should contain a plan-specific website address, which offers modeling tools, so participants can model other projections.”

“The DOL should allow plan sponsors to provide additional information (i.e., education) about their illustrations and projections, such as steps participants can take to get their retirement savings back on track, warning language about the potential impact of market volatility, and access to online calculators and other tools and resources that participants can use to generate more personalized illustrations and projections,” said Catherine J. Weatherford, president and CEO, Insured Retirement Institute.

The Plan Sponsor Council of America (PSCA) also commented it does not support a DOL mandate for lifetime income illustrations but, rather, favors directing participants to retirement income calculators instead (see "PSCA Disagrees with Lifetime Income Approach").

However, the Institutional Retirement Income Council (IRIC) recommended to the DOL that the lifetime income illustrations and projections be mandated as part of participant statements. They did agree that participants should be directed to the DOL’s interactive online calculator, so they can explore how changes in behavior or economic conditions might impact their retirement income (see "Lifetime Income Illustrations Should Be Mandated").

Safe Harbor

With regard to the safe harbor language in the proposed regulation, Hoffman said, “The proposal must include a ‘safe harbor’ for the assumptions used in calculating the lifetime income stream. The assumptions, however, should be modified and limited with the opportunity for more varied assumptions provided through an online calculator.”

He added, “The uncertainty of estimating future investment returns can be ameliorated by presenting the projected benefit using a range of investment rates of return. [T]he projected account balance should be shown assuming 3%, 5% and 7% as the nominal rate of investment returns. The discount for inflation should be 3% in each case. These three alternatives would allow the participant to choose the result that best matches the participant’s own expectations for future returns. To the extent there are any internal annuities held by the plan, the participant could periodically request that the plan administrator provide the calculation or can perform an estimate using the enhanced online calculator.”

Nelson expressed concerns about the safe harbor language and online modeling tools. “Given the extent of Web-based tools that have been developed to assist participants with retirement income planning and the current pace of development in this area, it is critical that the DOL’s rule regarding benefit statement illustrations not lead to fewer Web-based modeling tools and/or inhibit future development of these tools. We believe the ANPRM may cause plans to revert to the safe harbor standard lifetime income illustrations only and to avoid more robust and effective planning tools out of concern for fiduciary risk. ... We believe that revisions to the ANPRM are necessary in order to avoid those unintended consequences.”

Nelson added, “We are concerned that by creating a list of ‘safe harbor’ assumptions, which suggests that other assumptions may not be ‘safe,’ and not simultaneously clarifying that these illustrations are not fiduciary advice, the effect of the rule will be to limit the access participants have today to Web-based retirement income planning tools. It is our belief that the unintended consequence will not just be limited future innovation but may also cause plan fiduciaries to eliminate access to Web planning tools they are currently making available.”

In terms of recommendations specific to safe harbor assumptions, he suggested “including in the safe harbor the ability to show income projections in after-tax dollars assuming a flat 25% tax rate on all amounts,” as well as “the flexibility to either include or exclude participant loan balances.”

Weatherford’s view on the proposal’s safe harbor language was that, “We appreciate DOL’s effort to provide a safe harbor that provides assumptions plan sponsors can use to comply with the draft rule’s requirement that projections and illustrations be based on ‘reasonable assumptions.’ We are concerned, however, that this approach will steer plan sponsors to utilize the safe harbor assumptions to ensure compliance at the expense of flexibility and innovation. Projections and illustrations based on the safe harbor assumptions may be reasonable and appropriate, but more meaningful and individualized tools are currently available in the marketplace, usually on the Internet, but the safe harbor approach would likely discourage plan sponsors from making such tools available to their participants.”

If the safe harbor approach is not used, she recommended that the DOL simply require plan sponsors to provide lifetime income illustrations based on generally accepted investment theories and actuarial principles.

The PSCA expressed concern that the safe harbor language in the proposed regulation will result in a major reduction in the availability of other retirement income calculators, which would be to the detriment of participants (see “Industry Leaders to DOL: Don’t Stifle Innovation”).

The SPARK Institute expressed concern that any mandate for illustrations or conditions to a safe harbor that seem to favor particular assumptions could become the default way by which plan sponsors provide such illustrations and planning tools. The Institute recommended the DOL requirement in this area be general, accompanied by a broad and flexible safe harbor covering multiple approaches and forms of delivery (see “SPARKRecommends Disclaimers for Lifetime Income Illustrations”).