Employee Benefits Security Administration Rule: Pension Benefit Statements-Lifetime Income Illustrations
The rule was issued by
DATES: Effective date. This interim final rule is effective on
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This regulation reflects amendments made to ERISA section 105 by the Setting Every Community Up for Retirement Enhancement Act of 2019. When applicable, the interim final regulation requires plan administrators of ERISA defined contribution plans to express a participant's current account balance, both as a single life annuity and a qualified joint and survivor annuity income stream.
These two income stream illustrations, which must be on the same pension benefit statement, will help participants better understand how the amount of money they have saved so far converts into an estimated monthly payment for the rest of their lives, and how this impacts their retirement planning.
The regulation provides plan administrators with a set of assumptions to use in preparing the lifetime income illustrations, as well as model language that may be used for benefit statements by plan administrators who wish to obtain relief from liability for the illustrations.
The interim final regulation also requests comments from interested parties on the requirements and methodologies of the regulation.
SUPPLEMENTARY INFORMATION:
A. Background
(1) ERISA Section 105
Historically, section 105(a) of the Employee Retirement Income Security Act (ERISA) has required plan administrators of defined contribution plans to provide periodic pension benefit statements to participants and certain beneficiaries.[1] Benefit statements generally must be provided at least annually. If the pension plan permits participants and beneficiaries to direct their own investments, however, benefit statements must be provided at least quarterly. Section 105(a)(2) of ERISA contains the content requirements for benefit statements, including a requirement to indicate the participant's or beneficiary's "total benefits accrued." The other content requirements in section 105, such as vesting information, are not the focus of this rulemaking.
(2) Advance Notice of Proposed Rulemaking
On
(3) SECURE Act Amendments
On
The required lifetime income streams must be "based on assumptions specified in rules prescribed by the Secretary." In relevant part, section 105(a)(2)(D)(iii) of ERISA states that "[n]ot later than 1 year after the enactment of the [SECURE Act], the Secretary shall . . . prescribe assumptions which administrators of individual account plans may use in converting total accrued benefits into lifetime income stream equivalents[.]" This section also provides that the Secretary "shall . . . issue interim final rules . . ." within this timeframe.
Section 105(a)(2)(D)(ii) of ERISA provides for a model disclosure. In relevant part it states that "[n]ot later than 1 year after the date of enactment of the [SECURE Act], the Secretary shall issue a model lifetime income disclosure, written in a manner so as to be understood by the average plan participant."
Section 105(a)(2)(D)(iv) of ERISA provides a limitation on liability. In relevant part it states that "[n]o plan fiduciary, plan sponsor, or other person shall have any liability under this title solely by reason of the provision of lifetime income stream equivalents which are derived in accordance with the assumptions and rules [prescribed by the Secretary] and which include the explanations contained in the model lifetime income disclosure [prescribed by the Secretary]."
Section 105(a)(2)(D)(v) sets forth the effective date of the SECURE Act amendments. In relevant part it states that the new lifetime income disclosure provisions "shall apply to pension benefit statements furnished more than 12 months after the latest of the issuance by the Secretary of . . ." the interim final rules, the model disclosure, or the assumptions prescribed by the Secretary. This final rule is considered an E.O. 13771 regulatory action. We estimate that it will impose
B. Explanation of Interim Final Rule
(1) Overview--Required Lifetime Income Streams
The Department is publishing an interim final rule (IFR) requiring, consistent with the SECURE Act amendments to ERISA section 105 and the Department's prior work on issues related to lifetime income options in defined contribution plans, that plan administrators of individual account plans include two lifetime income stream illustrations on participants' pension benefit statements, in addition to the participant's account balance. Specifically, paragraph (a) of the IFR provides that these illustrations must be furnished to participants at least annually. And paragraph (b) requires, in relevant part, that pension benefit statements include: The value of a participant's account balance as of the last day of the statement period (paragraph (b)(2)); such account balance expressed as a lifetime income stream payable in equal monthly payments for the life of the participant (single life annuity) (paragraph (b)(3)); and such account balance expressed as a lifetime income stream payable in equal monthly payments for the joint lives of the participant and spouse as a qualified joint and survivor annuity (QJSA) (paragraph (b)(4)). The Department anticipates that this required information on a participant's pension benefit statement might appear as follows:
Account balance as of [DATE] ... Monthly payment at 67 (single life annuity) ... Monthly payment at 67 (qualified joint and 100% survivor annuity)
The specific requirements concerning these lifetime income illustrations, including the assumptions that must be used in preparing the illustrations, how the illustrations will be explained to participants, and the treatment of in-plan annuities, are discussed in the sections below. For purposes of the IFR, the term "participant" is defined, in paragraph (h)(1), to include an individual beneficiary who has his or her own individual account under the plan, such as an alternate payee for example. Throughout this preamble, unless otherwise specified, the Department intends this definition when using the term "participant."
(2) Assumptions for Lifetime Income Stream Illustrations
The IFR requires that plan administrators provide two lifetime income illustrations of the value of a participant's account balance, at least annually, on the participant's pension benefit statement. Plan administrators must prepare these lifetime income illustrations using the annuitization methodology set forth in the IFR, which will express a participant's account balance as a lifetime monthly payment to the participant, similar in form to a pension payment made from a traditional defined benefit plan. Insurance companies use this approach, for example, to determine payment amounts for their annuity products. Plan administrators, or their service providers, generally must consider four relevant factors when converting a participant's account balance into lifetime income streams. The first is the date the payments would start, referred to as the "commencement date," and the participant's age on such date. The second is the marital status of the participant. The third is the interest rate that will be applied for the applicable mortality period. And the fourth is the expected mortality of the participant and spouse. The IFR generally addresses the required assumptions for each of these factors in paragraph (c) of the IFR. This section of the preamble discusses the Department's reasoning behind the IFR's assumptions for these four factors, and other matters germane to annuitization illustrations.
(a) Commencement Date and Age
Paragraph (c)(1) of the IFR establishes an assumed annuity commencement date and age that plan administrators must use to prepare the required illustrations. Specifically, paragraph (c)(1)(i) provides that the assumed annuity commencement date is the last day of the statement period (the commencement date). Thus, for example, if the benefit statement covers the period ending on
The Department considered a number of alternatives to age 67. For example, the Department considered using a plan's "normal retirement age," as defined in ERISA section 3(34). The Department decided against using this date, because it lacks uniformity and consistency by leaving it to each retirement plan to determine the retirement age for its participants. The Department has placed a premium on uniformity and consistency for the illustrations required by this IFR. The Department also considered age 60, which closely aligns with the earliest age that a participant could withdraw money from a qualified retirement plan without being subject to additional income tax on the early distribution.[4] The Department also considered age 62, which is the earliest date a person can begin receiving retirement benefits (although reduced benefits) under Social Security.[5] The Department understands that age 62 is a very common age for people to claim
Although no specific age will be perfect for this purpose, the Department requests comments on whether age 67 is the most appropriate age. Commenters that believe a different age or approach would be better are encouraged to explain their reasoning and provide any germane literature or data supporting their reasoning. The Department also requests comments on whether the final rule should require illustrations based on multiple ages on the annuity commencement date, rather than requiring only a single age. For example, illustrations could be based on assumed annuity commencement ages of 62 and 67. This would present smaller and larger monthly payment amounts, illustrating the potential effects of delaying retirement on the amount of money a participant could receive each month. This approach would resemble the
(b) Marital Status and Amount of Survivor's Benefit
Paragraph (c)(2) of the IFR requires plan administrators to assume, for purposes of converting a participant's account balance into the QJSA required under paragraph (b)(4) of the IFR, that the participant is married and that the participant's spouse is the same age as the participant. Although a particular participant may not be married at the time a pension benefit statement is furnished, the statute nonetheless requires plan administrators to illustrate monthly payments reflecting both a single life annuity and a QJSA, and to assume a participant's spouse is the same age as the participant. By requiring both illustrations, participants (whether married or not) can better understand how a survivor benefit, if they are married at retirement and choose an annuity, could impact the amount of the participant's (and spouse's) monthly lifetime payment. According to general data from the
For the QJSA illustration, paragraph (c)(2)(ii) of the IFR requires plan administrators to assume that the survivor annuity percentage is equal to 100% of the monthly payment that is payable during the joint lives of the participant and spouse. The SECURE Act did not prescribe the specific survivor annuity percentage to be used for illustrations under section 105 of ERISA or whether the benefit decreases only upon the participant's death (a contingent annuity) or upon the first death of either spouse (a survivor annuity). Instead, the SECURE Act directed the Department to make these decisions.
The Department considered a contingent annuity percentage of 50 percent, which is the lowest percentage permissible under ERISA section 205(d). The Department decided against a 50 percent contingent annuity, in part, because commenters on the ANPRM indicated that this type of annuity may be uncommon in the commercial insurance market, even though a contingent annuity percentage of 50 percent is common for defined benefit plans. The Department has concerns with illustrating for participants an outcome that may be uncommon in the commercial marketplace. Furthermore, public commentary on the ANPRM implied that economies of scale for a two-person household do not necessarily decrease by exactly 50 percent when one person leaves the household.[10] Rather, general notions of scale economies in consumption for couples suggest a more modest reduction of approximately 30 percent.[11] The Department, accordingly, is persuaded that it may not be appropriate to assume that a worker has higher spending needs than a surviving spouse or that the spending needs of a surviving spouse are precisely half of the consumption needs of the couple in a two-person household.
The Department, however, has chosen to use an assumption with a survivor benefit of 100 percent, rather than a reduced percentage. By incorporating the most generous benefit for a surviving spouse, a participant's benefit statement will illustrate the largest difference between the monthly payment that would result from a single life annuity and that which would result from a QJSA. The Department believes there is a benefit to showing the participant these extremes because all other annuity options fall somewhere in between.[12]
(c) Interest Rate
Paragraph (c)(3)(i) of the IFR contains the interest rate assumption that must be used in preparing lifetime income illustrations under the IFR's annuitization methodology. Plan administrators must assume a rate of interest equal to the 10-year constant maturity
The Department solicits comments on whether the 10-year CMT rate assumption is the best interest rate assumption to use in this context, or whether a different interest rate or combination of rates should be used, and why. For example, should the Department consider using the "applicable interest rate" under Internal Revenue Code (Code) section 417(e)(3)(C)?[15] Furthermore, since the 10-year CMT rate fluctuates on a daily basis, we are soliciting comments on whether plan administrators should use the rate as published on the last (as opposed to the first) business day of the last month of the period to which the benefit statement relates. The IFR selects the first business day of such month in order to provide plan administrators with ample time to prepare and distribute benefit statements. Using the rate on the last business day of such month, however, would align with the date used for the account balance, and may not impose an unreasonable burden as interest rates are readily accessible and may be available before asset valuations are prepared.
(d) Mortality
Paragraph (c)(3)(ii) of the IFR requires that plan administrators convert participants' account balances assuming mortality "as reflected in the applicable mortality table under Code section 417(e)(3)(B) in effect for the last month of the period to which the statement relates." Code section 417(e)(3)(B) provides a unisex mortality table that is created and published by the
Other commenters offered different suggestions for how to factor participants' life expectancy into required lifetime income illustrations. Alternative recommendations included, for example, allowing plan administrators discretion to select reasonable mortality assumptions; if applicable, using the same mortality assumptions used for existing in-plan annuities; or requiring more conservative lifetime income illustrations (i.e., lower annuity payments) by adding a number of years (e.g., 5 or 10) to the Code section 417(e)(3)(B) mortality tables or mandating a specific end date, such as age 92 or 95. Some commenters questioned the use of a unisex methodology, such as in Code section 417(e)(3)(B), rather than gender-specific methodology. Their principal observation was that, although in-plan annuities must be priced on a gender-neutral basis, most plans do not actually offer annuities, and that gender-specific mortality assumptions would result in lifetime income streams that better reflect potential pricing in the commercial marketplace. Unisex tables result in illustrations with women's monthly payments being higher, and men's payments lower, than what individuals could actually purchase in the open market, all else equal, according to the commenters. Illustrations could have even wider variations when applied to same-sex spouses, some commenters noted.
The Department is not persuaded to use a different mortality assumption than was proposed in the ANPRM. Accordingly, paragraph (c)(3)(ii) of the IFR requires use of Code section 417(e)(3)(B) mortality tables. First, these tables are periodically updated by the
Finally, to the extent plan administrators and their service providers do not have gender data for all plan participants, the use of unisex mortality tables reduces administrative burden for plan administrators who lack gender data while still using reasonable assumptions. For example, a gender-distinct approach would require that the plan administrator know a participant's gender. A gender-distinct approach also would require the plan administrator to know the marital status of the participant and the gender of the participant's spouse. Commenters on the ANPRM indicated that plans currently do not consistently collect such information. Without these data points, a plan administrator would incur additional burdens to provide a gender-distinct illustration. A unisex approach to preparing lifetime income illustrations avoids these administrative complexities.
The Department requests comments on the IFR's use of the Code section 417(e)(3)(B) mortality tables. Commenters that believe a different approach is preferable are encouraged to identify their preferred approach and provide their reasoning in support of their position. Commenters that prefer a gender-distinct approach are encouraged to identify a table or tables that could be used to promote national uniformity and to identify the most efficient way to address the data gaps identified above.
Signed at
Acting Assistant Secretary,
[FR Doc. 2020-17476 Filed 9-17-20;
BILLING CODE 4510-29-P
The document is published in the
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