What You Need to Know
- The Secure Act required that participants be given lifetime income illustrations.
- The illustrations are confusing because they don't account for future earnings, lawyer Fred Reish says.
- Labor has received feedback from the private sector on how to improve the rule.
The retirement planning community is anxiously awaiting a final rule from the Labor Department on the delivery of lifetime income illustrations on plan participants’ benefit statements, as the interim rule that takes effect in September is flawed because the illustrations are confusing, according to ERISA lawyers from Faegre Drinker.
The interim rule implements Section 203 of the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, which was signed into law on Dec. 20, 2019. The Secure Act requires that participants be given lifetime income illustrations on their benefit statements — for instance, on their quarterly 401(k) plan statement. The illustrations are designed to help workers estimate how their current savings in a defined contribution plan translates into lifetime monthly payments.
The interim final rule that’s going into effect in September “is going to be confusing for folks and I don’t think it’s going to achieve the goal that Congress had in the Secure Act; even though DOL’s rule may be a faithful interpretation of what Congress wrote, I don’t think it’s what any of us would want them to mean,” Brad Campbell, partner at Faegre Drinker’s Washington office and former head of Labor’s Employee Benefits Security Administration, said Thursday during the law firm’s Inside the Beltway webcast.
Fred Reish, partner at Faegre Drinker, explained Thursday during the webcast that the Secure Act specified that the rule would not be effective “until a year after the DOL issues an interim final rule explaining how to do it.”
Last September, Labor issued that interim final regulation. This means that the rule becomes effective in September.
The interim regulation requires plan administrators of ERISA defined contribution plans “to express a participant’s current account balance, both as a single life annuity and a qualified joint and survivor annuity income stream.
“These two income stream illustrations, which must be on the same pension benefit statement, will help participants better understand how the amount of money they have saved so far converts into an estimated monthly payment for the rest of their lives, and how this impacts their retirement planning.”
The interim regulation requires that, for purposes of the illustrations, a participant’s current age be used, Reish explained. For instance, “a 30-year old would be assumed to be 67 and the illustration would be of what the participant’s account balance would buy at retirement without adjustment for future earnings.”
The methodology of the illustrations, Reish explained, is: “it takes your current balance, let’s say December 31 of this year, and it says what on that day would be an annuity if you were 67 years old.”