The Department of Labor unveiled an interim final rule Tuesday outlining how defined contribution plan sponsors governed by ERISA would provide participants with an annual lifetime income disclosure, converting their account balance into an 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 in December, required the Labor Department to promulgate the regulation and issue a final rule.
Using the 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 income stream; and second, as an income stream 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 illustrations using prescribed assumptions 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 what the lifetime income illustrations mean and the assumptions used to calculate the illustrations, the interim final rule states.
"Our 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. 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 the it's published in the Federal Register. But first, there will be a 60-day comment period, which the DOL 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; and 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, 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, 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.
A senior Labor Department official stressed on a call with reporters Tuesday 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.”
