On August 18, 2020, the U.S. Department of Labor (DOL) issued an interim final rule requiring 401(k) and other individual account plans to annually provide participants with lifetime income illustrations of their account balances. Specifically, the rule requires plans to annually disclose to each participant the hypothetical single life annuity (SLA) and qualified joint and 100% survivor annuity (QJSA) monthly payments that the participant’s account balance will yield based on various required assumptions. These illustrations will be required under provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), as discussed below, and are intended to help participants in individual account plans better understand how their account balances translate into monthly income in retirement and to better prepare for retirement.
The SLA and QJSA illustrations must be provided to any participant or beneficiary who has an account balance in the plan, and must be derived using the following assumptions:
- Commencement Date: The payments commence on the last day of the benefit statement period.
- Assumed Age: The participant is 67 years old on the commencement date, which is the Social Security full retirement age for most workers. The participant’s actual age must be used if the participant is older than 67.
- QJSA Assumptions:
- The participant and spouse are the same age, regardless of the participant’s actual marital status and regardless of the actual age of the participant’s spouse, if applicable.
- The QJSA pays a fixed monthly amount for the life of the participant, with the same fixed monthly amount going to the surviving spouse after the participant’s death (i.e., a joint and 100% survivor annuity).
- Interest Rate: The 10-year constant maturity Treasury rate (10-year CMT) as of the first business day of the last month of the statement period. The 10-year CMT approximates the rate used by the insurance industry to price immediate annuities. If the plan offers an in-plan distribution annuity through an annuity contract, the plan may use the actual terms of the plan’s insurance contract.
- Assumed Mortality: The gender-neutral mortality table in Section 417(e)(3)(B) of the Internal Revenue Code. This is the same mortality table generally used to determine lump-sum cash outs from pension plans.
- Vesting: The participant is 100% vested in the account balance.
The rule provides liability protection for providing the illustrations contingent on the illustrations including certain model disclosures. The model disclosures explain the various assumptions utilized for the illustrations, and also explain that the estimated payments are for illustrative purposes only and that benefits that may be purchased with the participant’s account balance will depend on a variety of factors and may vary substantially from the illustrations. The model language can be integrated into existing benefit statements or included in a supplement to the benefit statement. The rule also provides special rules that apply if a plan offers annuity distribution options or for participants that have purchased deferred annuities.
The rule is effective as of August 18, 2021 and applies to benefit statements provided after that date. However, the DOL has indicated that it plans to issue a final rule prior to that date with an adoption date that is sufficiently in advance of the effective date to minimize compliance burdens. Plan fiduciaries should reach out to their recordkeepers and third-party administrators to discuss future compliance with the rule and allocation of responsibilities.