What’s in a number? Retirement plan participants may soon better understand how account balances translate to retirement readiness. The SECURE Act enacted last December requires defined contribution plans to show participants the value of their account balances if converted into a monthly lifetime stream of income. The disclosures are aimed at reminding participants that retirement plan balances are meant to last for life – and busting the “wealth illusion” that single sum account balances present.
The details on the disclosures are starting to take form following an interim final rule recently released by the Department of Labor (“DOL”). Under the interim final rule, plans must provide participants with two lifetime income illustrations: the value of the benefit converted to (1) a single life annuity, and (2) a qualified joint and 100% survivor annuity (assuming the participant is married with a spouse of equal age). The DOL clarified in the final rule that the projections will be based on the participant’s current account balance (rather than a future projected value) and will show what that balance would buy purchasing an annuity at age 67 (or the participant’s actual age, if older).
Plans have been reluctant to communicate details like these to participants due to fiduciary risk of providing estimates that are almost certain to be incorrect. The final rule provides fiduciary protection to plans that use a standard set of assumptions and communicate certain model language to the participants. For plans with participant-directed investments, the disclosure must be provided at least once annually with one of the required quarterly statements. The disclosure requirement will become effective one year following the date the interim final rule is published. This means that the first disclosures are expected to hit participant mailboxes (or inboxes) sometime between Q3 2021 and Q2 2022.
One thing that plan sponsors and service providers will be monitoring is the scope of the fiduciary protection. The SECURE Act’s protections currently only apply to the two required illustrations. Some plans may want to offer additional illustrations, for example, one that projects a future value of the account based on earnings growth and subsequent contributions. That information might have more of an impact on participant contribution behavior and result in increased contribution levels and retirement readiness. The DOL has indicated that it cannot expand the SECURE Act’s fiduciary relief based upon the wording of the statute but the DOL is accepting comments on whether additional illustrations could be considered investment “education” under ERISA (rather than investment advice).
Stay tuned as the DOL may make some adjustments to the disclosure requirements, based on comments from the public, before the rules go into effect.