DOL's Lifetime Income Annuity Interim Rule Is Flawed, ERISA Lawyers Say

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.”

So, he continued, “if a 25-year-old has $20,000 in their account, it tells them what that amount would buy a 67-year-old. Now in my opinion, that’s not going to be particularly helpful, and will be confusing.”

Labor “is working on a final regulation,” Reish said, but it hasn’t been sent to the White House yet for review by the Office of Management and Budget. “That review could take a couple months. The process is behind schedule for providing the [lifetime income] information on quarterly statements” for Dec. 31.

As a result, Reish explained to ThinkAdvisor in a separate email, “the delivery of the illustrations to participants could be delayed to after the March 31 quarter or even after the June 30 quarter to allow time to review and digest the final regulation and to make any needed programming changes.”

Reish noted that while a final lifetime income statement rule is a priority for Labor, the recent ESG proposed regulation sent to OMB by Labor “was prioritized even higher.”

A final lifetime income rule “will definitely be to the OMB before the end of the year and hopefully a couple months before that, eg., by the end of October, so that it can be published in the Federal Register before the end of the year,” Reish said.

Labor received feedback from the private sector on how to improve the rule, Reish relayed. “If the DOL believes the feedback would improve the rule, within the context of the statute, it will issue a final regulation with those changes. It’s possible, but probably unlikely, that the DOL could finalize the rule without changes.”

In late July, Labor issued a set of FAQs “that basically said you don’t have to get that first one out until the end of a quarter within the next 12 months — so that would be the end of the quarter by June 30 of next year,” Reish explained.

The FAQ also set out that even though the Secure Act “mandates these [lifetime income statement] disclosures, you can also provide other disclosures because we know some recordkeepers have been giving retirement income projections for years now and we don’t want participants to lose that continuity,” Reish said.

Campbell added during the webcast that the delay in issuing a final rule suggests Labor “may be revisiting some of these decisions from the interim final rule,” noting the rule is “flawed as it is.”