Retirement plan lifetime income illustrations

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 was the most significant piece of legislation impacting the US Retirement Plan System since the Pension Protection Act of 2006. One clear priority of this act was to introduce practical solutions to better help participants understand and be prepared to deal with the drawdown stage of the retirement planning lifecycle. This is reflected in Sections 203, 204 and 109 of the Act, which provision for the disclosure of lifetime income within participant statements, a Safe Harbor for selection of lifetime income providers, and the portability of lifetime income options, respectively. While Sections 204 and 109 make it more seamless for a plan sponsor to include annuity and lifetime income investment options within the plan’s menu, Section 203 differs in that it creates an actionable mandate for plan sponsors to address.

Section 203 of the SECURE Act amends the language of Section 105 of the Employee Retirement Income Security Act (ERISA), which addresses the requirement that plan sponsors send statements to plan participants on a quarterly basis (annual basis if the plan is not self-directed) to demonstrate their benefits in the plan. The original iteration of the language required only that the statement provide the participant’s account balance in the plan, while the amendment requires that, on at least an annual basis, the statement illustrate what that balance would translate to in terms of a monthly income stream.¹

Congress tasked the Employee Benefits Security Administration of the Department of Labor (EBSA) with implementing this new requirement. In its Interim Final Rule (IFR), EBSA mandates that the following be disclosed within the statement:²

1. The statement period (the beginning and ending dates of the period)
2. The participant’s account balance as of the end date of the period
3. Illustration of the balance as a monthly payment from a Single Life Annuity (SLA) and a Qualified Joint and Survivor Annuity (QJSA)

In its FAQ addressing the IFR, EBSA addresses the following key points:³

1. Self-directed plans have until the statement period ended June 30, 2022 to comply with the lifetime income requirement created by the SECURE Act
2. Non self-directed plans must publish the initial lifetime income illustration no later than the first statement following the first plan year ending on or after September 19, 2022 (since they are required to produce a statement only annually, per Section 105 of ERISA, timing of enforcement differs)

EBSA’s IFR also addresses the assumptions that must be used when calculating the lifetime income illustration:⁴

• Monthly payments to begin on the last day of the statement period.
• Monthly payments begin when the participant reaches age 67. If a participant is older than 67, then the plan sponsor will use the participant’s actual age.
• Mortality is based on the gender neutral mortality table in the Internal Revenue Code, Section 417(e)(3)(b)
  • For the SLA illustration, the assumption is that it will pay a fixed amount until the participant dies
  • For the QJSA illustration, the assumption is that the participant has a spouse of equal age and that the fixed amount will continue to be paid after the participant’s death
• The interest rate required to be used in the calculation is the 10-year constant maturity Treasury rate as of the first business day of the last month of the statement period

With Section 203 of the SECURE Act, Congress is clearly acknowledging and trying to provide practical assistance with the challenges presented by the shift of responsibility for the drawdown of retirement benefits from the plan sponsor to plan participants as defined contribution (e.g. 401(k), 403(b)) plans have displaced traditional pension plans as the primary source of retirement savings. Though these new illustrations have the potential to cause concern for some participants who may be surprised by what their current plan balance translates to in terms of income, they create an important opportunity for plan sponsors to engage with and educate their employees on the importance of saving for retirement and general principals related to investing, as well as provide a deeper, more personalized participant engagement program like financial wellness.

This is an important and timely opportunity as financial wellness is already on the minds of plan participants. According to the latest UBS Workplace Voice survey, 83% of employees expect employers to help them reach their retirement goals. This was a common expectation across all generations in the workforce, with the highest concentration among millennials.⁵ Supplemented with proper employee engagement, these illustrations should ultimately create a simplified and more concrete means for participants to better understand what their benefits under the plan will translate to in terms of income in retirement.

Talk to your plan’s advisor to learn more about educational or financial wellness services that are available and how they can benefit plan participants over the long run.

Authored by: Thomas Cooke, Associate Director, Retirement Plan Services, UBS