DOL Issues ANPRM Seeking Input on Lifetime Income Illustrations for Benefit Statements | Practical Law

DOL Issues ANPRM Seeking Input on Lifetime Income Illustrations for Benefit Statements | Practical Law

The Department of Labor's Employee Benefits Security Administration (EBSA) issued an advance notice of proposed rulemaking (ANPRM) under Section 105 of the Employee Retirement Income Security Act of 1974 (ERISA) on lifetime income illustrations to be provided to participants in defined contribution plans as part of their benefit statements. The ANPRM requests comments on language and concepts in advance of the proposed regulations.

DOL Issues ANPRM Seeking Input on Lifetime Income Illustrations for Benefit Statements

by PLC Employee Benefits & Executive Compensation
Published on 07 May 2013 • USA (National/Federal)
The Department of Labor's Employee Benefits Security Administration (EBSA) issued an advance notice of proposed rulemaking (ANPRM) under Section 105 of the Employee Retirement Income Security Act of 1974 (ERISA) on lifetime income illustrations to be provided to participants in defined contribution plans as part of their benefit statements. The ANPRM requests comments on language and concepts in advance of the proposed regulations.
On May 7, 2013, the DOL's Employee Benefits Security Administration (EBSA) issued an advance notice of proposed rulemaking (ANPRM) under Section 105 of ERISA on lifetime income illustrations to be provided to participants in defined contribution plans, such as 401(k) and 403(b) plans. ERISA Section 105 requires administrators of defined contribution plans to provide periodic benefit statements to participants and certain beneficiaries. The ANPRM would require each participant's benefit statement to represent his accrued benefit as an estimated monthly lifetime stream of payments, in addition to an account balance.
The ANPRM:
  • Solicits comments and presents questions, ideas and potential language on certain rules EBSA is considering as part of the proposed regulations. Comments are due by July 8, 2013.
  • Contains an Appendix A that provides an example demonstrating how to calculate a lifetime income illustration under the proposed regulatory framework.
EBSA also created an interactive calculator that computes monthly lifetime income streams based both on a participant's current account balance and on his projected account balance at retirement, in accordance with the assumptions made in the ANPRM and the proposed regulatory framework.

Pension Benefit Statements

The ANPRM provides that EBSA is considering a proposal that would require pension benefit statements for all defined contribution plans under ERISA Section 105 to include:
  • The value of the account balance as of the last day of the period covered by the statement.
  • A projected account balance.
  • Two lifetime income illustrations showing a participant's or beneficiary's:
    • current account balance (the fair market value of the account as of the last day of the period covered by the statement) and an estimated lifetime income stream of payments based on such balance (assuming the participant had reached normal retirement age as of the date of the statement); and
    • projected account balance (for a participant who has not yet reached normal retirement age as of the date of the benefit statement) and an estimated lifetime income stream based on such balance.
The benefit statements would also be required to contain:
  • An understandable explanation of the assumptions behind the lifetime income stream illustrations.
  • A statement that projected account balances and lifetime income stream illustrations are estimates and not guarantees.

Lifetime Income Illustrations and Assumptions

The lifetime income illustrations would be presented as estimated monthly payments based on the expected mortality of the participant. If the participant has a spouse, the lifetime income streams would be based on the joint lives of the participant and spouse.
The illustrations also depend on the use of certain assumptions such as:
  • Contribution and investment assumptions needed to project an account balance to a person's retirement age.
  • Interest rate and mortality assumptions needed to convert an account balance into a lifetime income stream.
The ANPRM permits reasonable assumptions that consider generally accepted investment theories but also provides for safe harbors under which assumptions are deemed reasonable for:
  • Projecting account balances. This safe harbor deems it reasonable to assume these rate increases when projecting account balances:
    • contributions continue to normal retirement age at the current annual dollar amount, increased by 3% per year;
    • investment returns of 7% per year; and
    • a discount rate of 3% per year (to illustrate the projected account balance in current dollars).
  • Converting current account balances into lifetime income streams. This safe harbor deems it reasonable to make these assumptions when converting account balances to lifetime income illustrations:
    • interest rates equal the ten-year constant maturity Treasury securities rate;
    • mortality as illustrated under the mortality tables in Section 417(e)(3) of the Internal Revenue Code;
    • a married participant's spouse is the same age as the participant;
    • payments begin immediately; and
    • the participant has reached normal retirement age (if younger than normal retirement age).

Practical Implications

Written comments are due by July 8, 2013 on specific language and concepts in advance of the proposed regulations. Since the ANPRM solicits comments on reasonable alternatives to proposed regulations, including if there is a way to get plan administrators to voluntarily provide participants and beneficiaries with helpful lifetime income illustrations, it is unclear what illustrations (if any) the proposed regulations will require.
While employers generally have been hesitant to offer annuities in their defined contribution plans due to regulatory barriers, guidance that makes it easier for defined contribution plans to offer participants the option of purchasing annuity contracts is expected soon (see Legal Update, IRS Proposes Guidance Simplifying Use of Annuities in Retirement Plans). If that guidance is issued shortly, coordination between this expected guidance and the guidance the ANPRM contemplates may be necessary.