Changes wanted on lifetime income proposal

As the retirement industry prepares to provide mandatory annual lifetime income disclosures to participants in ERISA-governed defined contribution plans, a variety of stakeholders are calling on the Department of Labor to make changes before the rule goes into effect next year.

In August, the Labor Department unveiled an interim final rule outlining how plan sponsors would convert participants' account balances into an estimated monthly income stream at retirement. The Setting Every Community up for Retirement Enhancement Act, a comprehensive retirement security package known as the SECURE Act that Congress passed late last year, required the Labor Department to promulgate the regulation and issue a final rule.

Following a 60-day comment period that concluded last month, the Labor Department is now reading through the retirement industry's observations and suggestions before it issues a final rule, which likely won't happen until the Biden administration is in office next year. Since the rule was established under the bipartisan SECURE Act, the incoming administration is unlikely to attempt any fundamental changes, sources said.

There were a few common suggestions and clarification requests in many of the 36 comment letters the Labor Department received, chief among them repeated calls to amend the assumptions used to calculate lifetime income projections.

Using assumptions set forth in the rule, plan administrators would 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 marital status and assumed age at the start of the annuity.

By using a snapshot of a participant's income projection that does not include future contributions, future earnings or the account's performance growth, the lifetime income projection "that will be shown is not necessarily going to be realistic based on that individual's circumstances," said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute in Washington.

House Ways and Means Committee Chairman Richard Neal, D-Mass., also took issue with the interim final rule and said in a comment letter that there is no basis for the assumption that a 31-year old will earn zero from age 31 to 67. "I urge you to correct this aspect of the interim final rule," Mr. Neal said. "Projecting that employees' 401(k) accounts will earn zero over 30 or 40 years was not the type of assumption Congress intended the department to require."

The interim final rule's assumption will produce a "static number that won't mean anything to a large number of participants," said Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington. Though Ms. Robinson, whose organization represents a number of large plan sponsors, supports lifetime income and participant education, she takes issue with the mandated nature of the rule and said it could lead to participant confusion.

Record keepers, like Greenwood Village, Colo.-based Empower Retirement, will be the ones tasked with making the lifetime income calculations. Edmund F. Murphy III, president and CEO at Empower, said in a comment letter that his firm has concerns that the interim final rule could have the unintended consequence of discouraging the use of more robust lifetime income illustrations.

"We need the flexibility to innovate as new delivery tools are developed," Mr. Murphy said. "It would be helpful if DOL would clarify that the (interim final rule) is not intended to limit additional (lifetime income illustrations) to only being offered on benefit statements with the DOL-prescribed model but may be provided on a variety of platforms and formats."

Empower pointed to the interim final rule's preamble in which the Labor Department noted that many plans already offer lifetime income illustrations that are "interactive, stochastic, and tailored to the individual plan and plan participant" and in many respects, are "superior for financial and retirement planning purposes to a one-size-fits-all, deterministic model like that in the (interim final rule)." The Labor Department said that it does not "want to undermine these best practices or inhibit innovation in this area. The department encourages the continuation of these practices."

But unless that message is articulated in the final rule itself, some stakeholders are concerned plan sponsors and service providers will curtail their lifetime income illustrations.

Chantel Sheaks, executive director of retirement policy at the U.S. Chamber of Commerce in Washington, said the SECURE Act provision on which the interim final rule is based has a good concept, but didn't "keep up" with the market.

"We want to make sure that we don't discourage plan sponsors and service providers and record keepers from giving more robust calculators and tools and other kinds of information that are going to be more meaningful for participants and beneficiaries," Ms. Sheaks said.

Mr. Berkowitz said it's essential that the Labor Department classify additional information, calculations, or guidance to plan participants or beneficiaries as purely educational and not investment advice, the latter of which could have a chilling effect on such participant education. "Without that you have the risk that a participant could see that illustration and misunderstand that it's just an illustration and not a guarantee," he said.

If changes are not made to the interim final rule, Mr. Berkowitz urged the Labor Department to provide further liability relief through a safe harbor for plan sponsors and service providers who provide additional illustrations and educational tools, beyond those required by the rule.

Ms. Robinson said she's open to anything that allows plan sponsors to provide information that is pertinent and useful to their participants. "A lot of plan sponsors are already providing this information, so to have to take a step backwards really doesn't make sense," she said. "So if there's a safe harbor that can include the kind of information that they're already providing, we would definitely be in favor of that."

The reason why liability protection is needed? Plan sponsors are "very leery to go out on a limb because of the aggressiveness of some of the plaintiffs' bar," Ms. Sheaks said.

With a little more than a month left in the Trump administration's tenure, sources expect the final rule to come out under the Biden administration, but without any major shifts.

"This is a bipartisan issue, it's not about left and right, Democrat or Republican, this is about making sure that retirement savers have information to help them really understand what their current account balance and future contributions would result in when they get to retirement age," Mr. Berkowitz said.

Ms. Sheaks added, "I think they have some wiggle room here and there, but I don't see any huge departures from what we have."