Effective September 18, 2021, plan administrators of ERISA-covered defined contribution plans must update their benefit statements to display each participant’s account balance expressed as both a single life annuity and a qualified joint and survivor annuity.

Background

The reporting and disclosure requirements applicable to employer-sponsored retirement plans under the Employee Retirement Income Security Act of 1974 (ERISA) mandate that plan administrators furnish periodic benefit statements to all plan participants.

The SECURE Act, which was signed into law in December 2019, modified those requirements as they apply to defined contribution plans, including 401k and profit-sharing plans, which typically do not pay benefits in annuity form. On an annual basis, the statement must not only show the participant’s account balance, but must project the benefit that could be provided by that account balance, both as a single life annuity ( i.e., a fixed monthly payment for the life of the participant only) and as a qualified joint and survivor annuity (i.e., a fixed monthly payment for the life of a participant, and a continuing monthly benefit in the same amount thereafter to the participant’s surviving spouse).

Lifetime income illustrations are intended to show the monthly income a participant could expect to collect upon retirement based on the current account balance. The Department of Labor (DOL) believes that these projections will motivate workers to increase their contributions and retirement savings. Further, the DOL asserts that by making the information readily available on an annual basis, workers will be better educated and prepared for retirement.

In Interim Final Rules published in September 2020, the DOL detailed the content that must be incorporated in the annual notice to satisfy the lifetime illustration requirements and provided two model statements. Among the new requirements are the following:

• The beginning and ending dates of the statement period must be displayed.
• The value of a participant’s account balance as of the last day of the statement period (excluding any deferred annuity income) must be included.
• A participant’s account balance must be displayed as a single lifetime annuity and as a qualified joint and survivor annuity.
• An explanation of each lifetime income stream must be attached to each statement. The DOL has provided model language that can be used for this purpose, including modified language for those plans that offer distribution in annuity form.

Plans that are required to issue benefit statements each quarter (i.e., participant-directed individual account plans) must provide the initial benefit statement with lifetime income illustrations no later than June 30, 2022. All other plans must include these new lifetime illustrations beginning with the statements for the first plan year ending on or after September 19, 2021. (For calendar year non-participant directed plans, the deadline is October 15, 2022.) Thereafter, these lifetime illustrations must be furnished annually.

In specifying the assumptions used to calculate the lifetime income illustrations, the DOL has taken a generalized approach for standardization and to reduce the administrative burden imposed on plan recordkeepers. The following assumptions are to be used:

Annuity Commencement Date and Age
The assumed annuity commencement date is the last day of the statement period, and the age used to prepare the illustrations is to be age 67 or older. Although many workers retire earlier, DOL chose age 67 because it aligns with the full Social Security retirement age.

Marriage Status
Each participant is assumed to be married, regardless of actual marital status, and each spouse is assumed to be the same age as the participant.

Interest Rate and Mortality Table
An interest rate equal to the 10-year constant maturity Treasury rate and a unisex mortality table are to be used.

Insurance Loads/Cost of Living Adjustments
No insurance loads are to be assumed, and, unlike Social Security payments, these estimates are not subject to cost-of-living adjustments.

Most third-party recordkeepers and administrators should be well-equipped to conform to the lifetime illustration requirements without difficulty through actuarial consultants or commercial software.

Self-administered defined contribution plans are likely to find compliance more challenging and economically burdensome since retaining the services of a third-party administrator or actuary may be essential. These plan administrators should consider using the model benefit statements found in Appendix A and B of the DOL Interim Final Rules. Importantly, all plan administrators should initiate discussions with their advisers as soon as possible to assure they will be prepared to comply.

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