Regulatory guidance is closer to fruition that may help 401(k) and 403(b) plan sponsors better educate plan participants on lifetime income options, and may allay their concerns about the expense and legal risk of doing so. On May 8, the U.S. Department of Labor’s Employee Benefits Security Administration issued an advance notice of proposed rulemaking that explains options being considered in upcoming proposed rules on lifetime income illustrations in pension benefit statements and solicits comments on those options or possible alternatives.
Section 105 of ERISA requires defined contribution plan administrators to provide pension benefit statements to participants and certain beneficiaries at least annually (or quarterly if investments can be self-directed). Such statements must indicate the “total benefits accrued.”
Generally, DOL is proposing that a participant’s accrued benefits: (1) be expressed on his or her pension benefit statement as both a current account balance and an estimated lifetime stream of payments; and (2) be projected to his or her retirement date and then converted to and expressed as an estimated lifetime stream of payments. In developing ideas, DOL reviewed comments from a February 2010 request for information notice (See 75 Fed. Reg. 5253) and two September 2010 hearings. Here is what DOL is considering:
- Current balance. The statement would contain the individual’s current account balance, which also would be converted to an estimated lifetime income stream of payments based on reaching normal retirement age.
- Projected account balance. For participants not yet at normal retirement age, the statement would show the projected account balance, as well as the lifetime income stream it generates. The current balance would be projected to normal retirement age, based on assumed future contribution amounts and investment returns. The projected balance would be converted to an estimated lifetime income stream of payments, assuming that the person retires at normal retirement age.
- Lifetime income illustrations. Both lifetime income streams (that is, the ones based on current and projected balances) would be presented as estimated monthly payments based on the individual’s expected mortality. Joint lives would be presented in the lifetime income streams if the individual is married.
- Disclosures. The statements would contain: (1) an understandable explanation of the assumptions behind the illustrations; and (2) language explaining that projections and illustrations are estimates and not guarantees.
- Reasonableness standard. A general rule would be established that would allow a broad array of projection “best practices” to continue if such projections are: (1) based “on reasonable assumptions taking into account generally accepted investment theories”; and (2) are expressed in current dollars and takes into account future contributions and investment returns.
- Safe harbor. A safe harbor option would allow plan administrators to be certain they satisfied the primary elements of the general reasonableness rule. However, by establishing a specific set of assumptions for contributions, returns and inflation, this option would be narrower and more prescriptive.
- Annuitization approach. In expressing current and projected account balance as a lifetime stream of income, DOL is considering using an annuitization approach. Generally, this would express the benefit as a lifetime monthly payment to the participant similar in form to a pension payment made from a traditional defined benefit plan.
- Safe harbor mortality and interest rate assumptions. DOL agreed with many commenters that when a plan offers an annuityform of distribution, the actual mortality and interest rate provisions in the annuity contract should be reflected in the lifetime income illustrations. As such, that will be part of the proposed regulation. However, for plans that do not offer annuities, DOL is considering a safe harbor that generally would require illustrations to be based on “reasonable” mortality and interest rate assumptions “taking into account generally accepted actuarial principles.”
Comments on the ANPRM are due by July 8, and should be sent via E-ORI@dol.gov with RIN 1210-AB20 in the subject line of the message or to http://www.regulations.gov. They also can be mailed to the U.S. Department of Labor, Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, 200 Constitution Ave. NW, Washington, DC 20210, Attn: Pension Benefits Statement Project.
More information on retirement plan administration can be found in the 401(k) Plan Handbook and The 403(b)/457 Plan Requirements Handbook at http://hrcomplianceexpert.com.