The SECURE Act of 2019 changed many retirement plan rules to make it easier for employers to provide workplace savings opportunities for employees and to encourage employees to save for retirement. The changes covered in this final installment of the SECURE Act Series provide examples of how promoting the concept of lifetime income within the defined contribution (DC) retirement plan market can help accomplish both policy objectives.
“Lifetime income” in this context refers both to
- an investment product that guarantees a certain amount of income to a recipient over their and sometimes a spouse’s lifetime (e.g., an annuity) and
- calculating how a lump sum account balance could be used as monthly or annual payments to last throughout an individual’s lifetime.
As fewer and fewer companies offer defined benefit (pension) plans that guarantee lifetime retirement income, workers have had to learn how to save and invest for retirement and how to plan the timing and amount of withdrawals they can take each year without outliving their savings. Lawmakers have long been concerned that individuals do not have sufficient savings or the expertise they need to accomplish these important tasks. The following provisions in the SECURE Act attempt to address these issues.
Promoting Access to Lifetime Income Products in DC Plans
The use of lifetime income investment products in DC retirement plans, like 401(k) plans, has historically been limited, in part because it has been perceived as complex, expensive and risky for plan sponsor fiduciaries. To help plan sponsors feel more comfortable with selecting lifetime income products to include in their retirement plan investment line-up, the SECURE Act enhances the fiduciary protections for selecting lifetime income product providers. Effective January 1, 2020, plan fiduciaries have an optional safe harbor available to satisfy the prudence requirement when selecting a lifetime income provider. This safe harbor shields plan fiduciaries from liability for any losses that may result due to a provider’s inability to satisfy its financial obligations to pay out the promised income stream. To qualify for the safe harbor protection, fiduciaries must obtain certain representations from the provider and meet other due diligence requirements to determine if an insurance contract is appropriate and the fees reasonable.
Additionally, to help plan participants feel more comfortable in utilizing these types of investments, the SECURE Act provides that if a lifetime income investment option is removed from the plan’s investment menu, the participant can transfer that investment to another retirement plan or IRA without surrender charges or fees.
Requiring Lifetime Income Disclosures
To help plan participants understand how much they need to save to produce a stream of income throughout retirement, the SECURE Act requires plan sponsors to include in participant benefit statements at least once every 12 months a projection of the monthly amount a participant could receive in retirement based on their current account balance. This is meant to give participants better perspective on whether they are saving enough to meet their needs in retirement and time to increase their savings rates, if needed. Plan sponsors will not be liable for the projections if they are provided in accordance with guidance provided by the Department of Labor (DOL).
The DOL guidance provides standard assumptions plan sponsors must use to project a participant’s current account balance as monthly payments in retirement:
- Payments will be assumed to begin on the last day of the benefit statement period (for example, December 31 for a 4th quarter benefit statement).
- Participants are assumed to be age 67 on the date payments will start, or their actual age if older.
- A single annuity will pay a fixed monthly amount for the life of the participant with no survivor benefit.
- A qualified joint and survivor annuity (QJSA) will pay a fixed monthly amount for the life of the participant and the same fixed monthly amount to a surviving spouse after the participant’s death, assuming the spouse is the same age as the participant.
- The 10-year constant maturity Treasury securities rate as of the first business day of the last month of the statement period must be used to calculate the monthly payments (similar to the rate used by insurance companies to price immediate annuities).
- Life expectancy will be based on the gender-neutral mortality table used to determine lump sum cashouts from pension plans.
Plan sponsors must also include certain explanations with the projections to help participants understand how the monthly payments were calculated and that the estimates are not guarantees. The DOL provides model disclosure language that can be inserted into an existing benefit statement format as well as a Model Benefit Statement that can be used as a supplement to existing benefit statements. The lifetime income disclosure requirement becomes effective September 18, 2021.
Plan Sponsor Next Steps
Plan recordkeepers typically generate participant benefit statements on behalf of the plan sponsors, and many service providers are already providing similar illustrations for participants. These illustrations may continue to be used, but the DOL’s fiduciary liability protection only applies to projections that include the DOL’s standard assumptions and model language.
Plan sponsors should coordinate with their recordkeepers on the format and timing of the first participant lifetime income disclosures to be delivered. Plan sponsors may also want to work with their plan advisors to educate their participants about these projections and how they can be used to determine if an individual needs to increase their savings rate to meet their retirement income goals. Financial advisors can also work with plan sponsors to explore adding lifetime income products as part of a plan’s investment menu.