DOL working on lifetime income disclosure rule

It won't be long before defined contribution plan sponsors governed by ERISA must provide participants with an annual lifetime income disclosure, a fact that is leading retirement community stakeholders to either count down the days with anticipation or trepidation.

The Department of Labor on Aug. 18 unveiled an interim final rule outlining how plan sponsors would convert participants' account balances into an estimated monthly income stream at retirement. The move comes after the Setting Every Community up for Retirement Enhancement Act, a comprehensive retirement security package known as the SECURE Act that Congress passed in December, required the DOL to promulgate the regulation and issue a final rule.

Using assumptions set forth in the rule, plan administrators will show participants equivalents of their retirement savings as monthly income under two potential scenarios — first, as a single life annuity; and second, as a qualified joint and survivor annuity that factors in a survivor benefit, the Labor Department noted in a fact sheet.

Under the interim final rule, retirement plans would provide lifetime income forecast illustrations using prescribed assumptions — based on information like a participant's martial status and assumed age at the start of the annuity — designed to give savers a "realistic illustration of how much monthly retirement income they could expect to purchase with their account balance," the Labor Department said.

Moreover, retirement plans will provide explanations about the lifetime income forecasts — based on a participant's current account balance — and the assumptions used to calculate the forecasts, the interim final rule states.

J. Mark Iwry, non-resident senior fellow at the Brookings Institution in Washington and former senior adviser to the secretary of the Treasury and Treasury's deputy assistant secretary for retirement and health policy in the Obama administration, said the Labor Department interim final rule takes a "thoughtful and reasoned" approach to the issues, though it could be improved by expanding protection from liability for plan sponsors, including doing more to protect those currently providing forecasts using other assumptions.

In particular, Mr. Iwry is concerned that some younger participants with smaller current account balances might be discouraged from saving when they see how small their projected monthly income could appear to be. Those participants could be hit with "sticker shock; not that the price strikes them as so high but that the monthly benefit strikes them as so low," Mr. Iwry said.

Members of the SPARK Institute, which includes record keepers — the group that will be tasked with making the lifetime income calculations — have expressed similar concerns, said Tim Rouse, the Simsbury, Conn.-based group's executive director. SPARK members think record keepers should actively encourage participants to use modeling tools to develop a more robust and detailed forecast that could accommodate estimates of future earnings, Mr. Rouse added.

The interim final rule doesn't take into account future contributions or higher salary earnings, which isn't "necessarily a bad thing, but our members don't want the new lifetime income disclosure to demotivate small account balance savers; that is why they want to emphasize using more in-depth planning tools," Mr. Rouse said.

To mitigate the problem, Mr. Iwry would like the final rule to "also encourage plans to either illustratively project current balances to retirement age or encourage participants to use Labor's calculator to do their own projections," to illustrate the income value of continued saving.

In issuing the interim final rule, the Labor Department's goal is to help workers and retirees understand how savings translate to retirement income, said Jeanne Klinefelter Wilson, acting assistant secretary of labor for the Employee Benefits Security Administration, in a news release. "Defined contribution plan savings are meant to stretch across the years of retirement," she added. "When workers are reminded of what their balances could mean in terms of an estimated monthly dollar amount, they can use this information to plan both savings and spending."

The interim final rule will be effective 12 months after it's published in the Federal Register. But first, there will be a 60-day comment period, which the Labor Department said it will use to improve the rule before its effective date.

When converting a participant's account balance into lifetime income streams, a plan administrator or service provide generally must consider four relevant factors, the interim final rule stipulates:

• The date the payments would start and the participant's age at that point.
• The participant's marital status.
• The interest rate that will be applied for the applicable mortality period.
• The expected mortality of the participant and spouse.

Plan fiduciaries that use the regulatory assumptions and the model language laid out in the rule will qualify for liability relief and will not be held responsible in the event participants are unable to purchase equivalent monthly payments, the Labor Department noted.

Some plan sponsor groups have taken issue with the idea of providing participants with an annual lifetime income disclosure, which has been floated in various forms for roughly a decade.

"The ultimate goal was always to help participants get a better sense of what their 401(k) savings will mean in terms of retirement income," said Michael P. Kreps, Washington-based principal at Groom Law Group, who specializes in retirement issues. "There is no perfect way to make that kind of disclosure, and service providers have experimented with a number of different approaches over the years."

Will Hansen, executive director of the Plan Sponsor Council of America and chief government affairs officer at the American Retirement Association in Washington, takes issue with any mandate that makes it more difficult to operate a plan, which Mr. Hansen said this rule does. Further, the rule will lead to confusion among participants as to what the disclosures mean and what their given plan offers or doesn't offer with respect to annuities, he added.

Mr. Iwry said that while participant confusion can be a concern, widespread use of income illustrations in the market has demonstrated that they can be valuable and presented clearly.

The ERISA Industry Committee in Washington is "disappointed" by the interim final rule and has consistently opposed the "one-size-fits-all approach that uses government assumptions to calculate annuity-equivalents," said Aliya Robinson, senior vice president of retirement and compensation policy. ERIC believes that using online calculators and modeling tools "will better meet the goal of increasing participant understanding of the importance of lifetime income needs instead of a rigid, limited calculation based solely in the form of an annuity payment that does not include the unique circumstances of each participant," Ms. Robinson added.

A senior Labor Department official stressed on a call with reporters Aug. 18 that neither the interim final rule nor the SECURE Act requires participants to get their benefits as an annuity. Simply put, the goal is to get workers to save more for retirement, the official said, adding, "Seeing a retirement savings account balance expressed as a monthly lifetime income amount may prompt savers to increase their plan contributions, resulting in greater retirement savings. At a minimum, seeing savings reframed as a lifetime income amount will improve a participant's understanding about where he stands relative to his retirement needs."

Other stakeholders expressed similar views and applauded the Labor Department's efforts in promulgating the rule.

Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute in Washington, which has long advocated for a lifetime income disclosure in DC plans, said in a statement that an illustration that translates retirement account balances into monthly income "helps consumers to think of retirement savings more like a paycheck than a lump sum. The rule also should encourage workers to save more for retirement."

A spokesman for TIAA-CREF said that this type of disclosure will encourage participants to be more engaged. "More information like this leads to increased financial knowledge, more strategic long-term financial planning, and ultimately to better financial outcomes and wellness overall."