As part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, plan administrators will be required to provide illustrations of a participant’s account balance as an equivalent lifetime annuity. The Department of Labor (DOL) just announced the interim final rule, with guidance on how the illustrations will be calculated. The rule will go into effect one year after it appears in the federal register, which is expected soon. The DOL is accepting comments on the interim final rule within 60 days of its publication and expects to release the final rule ahead of the effective date. The details are available here.
The rule will require plan administrators to provide two lifetime income illustrations to participants at least annually. The illustrations will show what the expected monthly payment would be from an annuity purchased with their current account balance. One illustration will be for a single life annuity, that is, fixed monthly payments for the lifetime of the participant. The second illustration is for a qualified joint and survivor annuity, that is, fixed monthly payments for the lifetime of the participant and the lifetime of the participant’s spouse.
In 2018, I wrote about lifetime income projections and how they are calculated. The guidance for these new illustrations are a simplified version of those projections and require fewer data points about the participant. They do not attempt to project account balances to some future retirement date or assume any kind of contribution or investment return by the participant. Instead, they assume the participant is age 67, or their actual age if they are older than 67, and that the annuities begin immediately at the end of the statement date. As a result, these projections will likely be less accurate than projections many recordkeepers already provide that do estimate ongoing savings rates and investment returns.
It is important to understand that this is not an attempt to understand a participant’s retirement readiness. Young participants who have decades of contributions and market returns ahead of them are likely to see very low monthly payment illustrations.
As the interim final rule and final rule are published, we expect to see recordkeepers work to add these illustrations to participant’s quarterly statements. Plan sponsors should understand how their recordkeeper plans to meet this new requirement, as well as what kind of communication or education to participants will be included.
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