The Department of Labor's advanced notice of proposed rulemaking “sets forth certain language and concepts” that DOL is considering “as part of future proposed regulations” regarding sponsors' providing lifetime income information to participants, according to a summary on the DOL website.
This is a sidebar to: Defined contribution industry divided over how to provide lifetime income information.
Excerpted below are some of the lifetime income topics for which the DOL sought public comment.
- Pension benefit statements would contain a statement that projections and lifetime income stream illustrations are estimates and not guarantees.
- A participant's pension benefit statement would show his or her current account balance and an estimated lifetime income stream of payments based on such balance. The lifetime income illustration would assume the participant had reached normal retirement age as of the date of the benefit statement, even if he or she is much younger.
- For a participant who has not yet reached normal retirement age, his or her pension benefit statement also would show a projected account balance and the estimated lifetime income stream based on such balance. A participant's current account balance would be projected to normal retirement age based on assumed future contributions and investment returns. The projected account balance would be converted to an estimated lifetime income stream of payments, assuming the person retires at normal retirement age.
- Both lifetime income streams (i.e., the one based on the current account balance and the one based on the projected account balance) would be presented as estimated monthly payments based on the expected mortality of the participant. In addition, if the participant has a spouse, the lifetime income streams would be based on the joint lives of the participant and spouse.
- The proposal the department is considering would use the (annuitization) method … to convert an account balance to a stream of income in retirement. … This approach, for example, expresses the benefit as a lifetime monthly payment to the participant similar in form to a pension payment made from a traditional defined benefit plan. This approach also is the method that insurance companies use to determine payment amounts with their annuity products. … (Annuitization) reflects one of the department's primary goals in encouraging meaningful benefit statements — that plan participants and beneficiaries are informed of their financial readiness for the entirety of their retired lives, not just a portion of it.
- When projecting account balances, it is reasonable for a plan administrator to assume: contributions continue to normal retirement age at the current annual dollar amount, increased at a rate of 3% per year; investment returns are 7% per year (nominal); a discount rate of 3% per year, in order to show the projected account balance in today's dollars.
