The Pension Benefit Guaranty Corp. unveiled the final rules Monday for anyone who rolls over their 401(k) into an employer’s defined benefit plan, announcing that those dollars would not be affected by the PBGC’s guarantee limits.
Fewer employers nowadays offer a defined-benefit plan but where they do, the PBGC decision could help encourage participants looking for a guaranteed lifetime income stream.
Concerns about whether rolled-over assets would be protected by the PBGC in the event of a plan’s failure have until now discouraged the practice.
“The agency hopes to encourage people to get lifetime income by removing potential barriers to moving their benefits from defined contribution plans to defined benefit plans,” said PBGC in a news release. “The final rule removes the fear that the amounts rolled over would suffer under guarantee limits should PBGC step in and pay benefits.”
According to the final rules, defined contribution assets rolled into a defined benefit plan will be guaranteeable, even in the event that the insured assets exceed the maximum benefit paid out by the PBGC, which will increase to more than $60,000 next year.
The PBGC proposed the rule in April, receiving comments from the AFL-CIO, the American Council of Life Insurers and the AARP, all of whom supported the proposal as a way to promote lifetime-income products.
The final rule largely resembles the proposed rule, with the crucial difference being that all of the DC benefits — the employee’s contributions, the employer’s match, and all the returns on investment — will be treated as a defined benefit once rolled over and protected by the PBGC.
Additionally, the rolled over assets will not be affected by the PBGC’s five-year phase-in limits, which say the benefit increases from changes that occur in the five years prior to a plan’s termination will receive only partial protection.
Those benefits resulting from rolled over 401(k) plans will not be payable in a lump sum by PBGC, but rather as a monthly benefit over time, according to the final rules.
Rollovers do not present the same risk of loss to the PBGC as other DB assets, according to the agency’s explanation of the final rules.
That’s because the insured benefit derived from rollover assets is “actuarially equivalent” to the assets rolled over. In other words, a plan accepting a rollover becomes liable for greater payouts, but they are simultaneously receiving assets to cover the liability.
That, of course, is not true for most new benefit accruals, according to the PBGC.
The final rule is scheduled for publication in the Federal Register on Tuesday.