The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 called for the addition of lifetime income illustrations to plan participants’ benefit statements. The Department of Labor (DOL) has since released an interim final rule and a FAQ list to help clarify the requirements.
Retirement income projections include multiple variables and assumptions. The interim final rule (IFR) issued in September 2020, spelled out the baseline assumptions that plan administrators must incorporate in their projections. Those numbers are a starting place but not very realistic or informative for younger participants.
Michael Kreps, principal with Groom Law Group, Chartered in Washington, D.C., notes that Congress created the lifetime income disclosure to give participants a tool to better understand how much retirement income their savings will generate, but it’s just a rough estimate based on very conservative assumptions. “People are still going to need help figuring out what their options are,” said Kreps. “Hopefully, the disclosure can serve as a way to jumpstart those conversations sooner rather than later.”
In July 2021, the DOL released an FAQ list that gave additional guidance on implementation dates and allowed for supplemental retirement income projections. But while the FAQs were useful, they didn’t provide the clarification that advisors and sponsors were seeking. “I don’t think there was much confusion about those issues among practitioners, though DOL presumably heard from people that thought the regulation was unclear,” said Kreps. “The most interesting portion of the FAQs was that DOL signaled its intention to issue a final rule but declined to give us a firm timeline.”
Per the FAQs, the DOL plans to issue the final rule “as soon as practicable based on feedback from comments received during the public comment period on the IFR.” “ASAP” is a bit fuzzy but Brad Campbell, partner with Faegre Drinker Biddle & Reath LLP, noted that the fall regulatory calendar published this past December indicated the DOL is on schedule to issue a final rule in February 2022. Whether the agency will meet that target is an open question, Campbell said, given that it was originally scheduled for July 2021 and other DOL rules are behind schedule, as well.
Campbell cautiously speculates that the rule’s delay could be an indication that substantive changes are coming. One possible change could be to the income projection method the DOL used in the interim final rule, which takes the participant’s account balance at the end of the period and assumes that person is age 67 and retiring with that balance. That approach is not a “particularly useful projection” for a worker with a 40-year career ahead of them, Campbell observed. Fortunately, the current rule allows plans to use more realistic methods for both the accumulation and retirement income phases. “There's a lot of record keepers who are providing much more sophisticated educational tools that people can use to make similar calculations,” said Campbell.
Another question is whether the DOL will allow plans that have a retirement income vehicle in place to use that vehicle as the basis for income projections. “The big open question is whether DOL will make the final rule more flexible so the mandatory projections can more closely align with lifetime income options available in a particular plan,” said Kreps. “We don’t yet know how they will come out on that issue.”
In the meantime, plans need to work with the existing timing guidelines. The IFR took effect Sept. 18, 2021. Participant-directed plans that must issue quarterly statements can incorporate their first lifetime illustration on any quarterly statement up to the second calendar quarter of 2022 (ending June 30, 2022). Incorporating the statement by the end of Q3 2022 would be too late, though, because the ending date of the third calendar quarter, Sept. 30, 2022, would be after the expiration of the 12-month period.
According to the FAQ, plans in which a “participant or beneficiary has his or her own account but does not have the right to direct the investment of assets in that account, the lifetime income illustrations must be on the statement for the first plan year ending on or after Sept. 19, 2021. For most such plans, this will be the statement for calendar year 2021, which would be furnished no later than the last date for timely filing of the annual return for that year for a calendar year plan (Oct. 15, 2022).”
Whether or not we see some sort of transition relief from the DOL issued soon, plan sponsors can’t ignore the new rules. “Sponsors need to be ready to make the first lifetime income disclosure by the deadline, which is effectively Oct. 15 for most but not all plans,” Krebs advised. “That means coordinating with plan service providers to figure out how to prepare and distribute the disclosure. It’s important to have those conversations now. Oct. 15 seems like a long way off, but it will be here before you know it.”