In early May, the Department of Labor released an advance notice of proposed rulemaking containing intended proposed regulations that would require all defined contribution plan benefit statements to include lifetime income stream illustrations based on current and projected account balances. Following the publication of the notice, legislation that would require defined contribution plan benefit statements to include lifetime income projections was re-introduced in both the House and Senate. The active interest in lifetime income disclosure requirements on the Hill as well as at the Department of Labor suggests that there is a good chance that a lifetime income disclosure requirement of some sort will be imposed in the next few years.
Proposed Lifetime Income Illustration Requirement
The DOL's interest in a lifetime income disclosure requirement is not new. In February 2010, the DOL and Internal Revenue Service released a Request for Information ("RFI") soliciting comments on a number of lifetime income-related topics, including whether and how pension benefit statements should present accrued benefits as a lifetime income stream of payments. According to the ANPRM, comments received in response to the RFI led the DOL to conclude that showing participants a projection of the monthly incomes they will receive from their retirement plans may motivate workers to increase their savings by changing "the perception of retirement savings from simply a savings account to a vehicle for income replacement during retirement."
Under the intended proposed regulations included in the ANPRM, DC plan benefit statements would be required to include:
- An estimated "lifetime income stream" (i.e., level monthly payments made over the life of the participant) based on the participant's account balance. The lifetime income stream would be calculated using the first day following the period to which the statement relates as the benefit commencement date and assuming the participant has reached normal retirement age (as defined in ERISA Section 3(24)) or the participant's actual age, if greater;
- If the participant has not reached normal retirement age (as defined in the plan), a projected account balance at normal retirement age and an estimated lifetime income stream based on that projected balance (calculated in the same manner as the lifetime income stream based on the current account balance);
- If the participant is married, estimated lifetime income streams based on the participant's current and projected account balances with the additional assumptions that the participant's spouse is entitled to a 50% survivor's benefit and the spouse's age is the same as the participant's; and
- An explanation of the assumptions used to calculate the projected account balance and lifetime income stream(s).
The intended proposed regulations provide that the projected account balance must be "based on reasonable assumptions taking into account generally accepted investment theories." Projections must be expressed in current dollars and must take future contributions and investment returns into account. The regulations list the following safe harbor assumptions: 1) continued contributions to normal retirement age equal to the participant's current dollar contribution plus a 3% annual increase, 2) nominal investment returns of 7% per year and 3) a discount rate (for establishing the value of the projected account balance in current dollars) of 3%.
With respect to the calculation of hypothetical lifetime income streams, the intended regulations provide that the interest and mortality assumptions used must be "reasonable taking into account generally accepted actuarial principles." The regulations list the following safe harbor assumptions: 1) an interest rate equal to the 10-year constant maturity Treasury securities rate for the first business day of the last month of the period to which the statement relates and 2) determination of mortality using the applicable mortality table under Section 417(e)(3)(B) of the Internal Revenue Code for the month that contains the last day of the period to which the statement relates. If the plan offers an annuity form of distribution, however, lifetime income streams would have to be calculated under the plan's terms.
The intended proposed regulations would require DC plan benefit statements to "prominently display" the beginning and ending dates of the period covered by the statement. (Statements must be provided quarterly to participants and beneficiaries who have the right to direct their investments in the plan and on an annual basis otherwise.)
The DOL has posted an interactive lifetime income stream calculator on its website that uses the safe harbor assumptions listed in the ANPRM.
The intended proposed regulations do not address whether a lifetime income illustration may create a basis for a claim for benefits under the plan. However, the DOL acknowledged RFI commenters' concern that the lifetime income illustrations may expose employers to litigation based on unrealized expectations. According to the ANPRM, the DOL believes that including a statement that the lifetime income illustration is an estimate rather than a guarantee and establishing safe harbor assumptions for performing the calculations is sufficient to address the threat of lawsuits.
Lifetime Income Disclosure Act
The Lifetime Income Disclosure Act, which was last introduced in 2011, was re-introduced in the House in late May and in the Senate in mid-June. The legislation would require DC plan sponsors to include a projection in each participant's annual pension benefit statement of the amount of monthly payments the participant would begin to receive if his or her accrued benefits were used on the date of disclosure to purchase either a single life annuity or a qualified joint and survivor annuity. The DOL would be required to prescribe assumptions – either a single set of assumptions or ranges of permissible assumptions – for DC plan administrators to use in converting participants' account balances into annuity equivalents. The bill provides that plan sponsors and service providers that use the DOL assumptions are exempt from liability with respect to the projections.
The Lifetime Income Disclosure Act will almost certainly not be enacted during the current session of Congress, and the ANPRM is only an official announcement of the DOL's interest in issuing proposed regulations. Nevertheless, the re-introduction of the Lifetime Income Disclosure Act and the publication of the ANPRM indicates that lifetime income disclosure requirements remain a subject of interest on the Hill and at the DOL and suggests that a lifetime income disclosure requirement of some sort may well be imposed in the next few years.
The form that requirement will take remains uncertain, however. The re-introduction of the Lifetime Income Disclosure Act, which would amend the section of ERISA under which the intended regulations fall, suggests that the bill's sponsors believe the DOL lacks the necessary authority to promulgate the intended proposed regulations under current law.
Furthermore, the safe harbor and normal retirement age assumptions prescribed by the ANPRM are likely to be criticized on the grounds that they will produce misleading estimates with respect to participants who are far from retirement. Given that the ANPRM repeatedly invites comments on the topic, it would not be surprising if the DOL revises the safe harbor and normal retirement age assumptions before issuing proposed regulations.