DOL Releases Interim Final Rule on New Disclosures for Pension Benefit Statements
The Department of Labor (DOL) has recently published interim final regulations pursuant to changes enacted by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) which require plan administrators of defined contribution plans to express a participant’s current account balance both as a single life annuity and a qualified joint and survivor annuity stream on their pension benefit statements at least once every 12 months.
Section 105 of the Employee Retirement Income Security Act of 1974, as amended (ERISA) requires administrators of defined contribution plans to provide benefit statements on a periodic basis. The SECURE Act amended ERISA Section 105 to require benefit statements to include a statement of a participant’s current account balance and an estimated lifetime stream of payments. This lifetime stream of payments is to be shown as both a single life annuity (SLA) and as a qualified joint and survivor annuity (QJSA). These changes will impact all defined contribution plans, including 401(k) plans and employee stock ownership plans (ESOPs).
The interim final regulations set forth the assumptions administrators must use to calculate a participant’s retirement benefit and include model language that, if used, protect such administrators from liability that could arise in the event the calculations do not reflect the actual benefits a participant eventually receives.
Calculation of the benefit. The value of a participant’s account balance is calculated as of the last day of the statement period. To calculate a participant’s benefit, the interim final regulations provided assumptions that a plan administrator must follow. These assumptions include:
Assumed Commencement Date: An administrator must calculate monthly payments as if such payments begin on the last day of the benefit statement period.
Assumed Age: An administrator must assume that the participant is the older of age 67 or the participant’s actual age.
Spouse and Survivor Assumptions: An administrator must assume the participant’s spouse is the participant’s same age regardless of the participant’s marital status and must use a 100% QJSA.
Assumed Interest Rate: An administrator must assume a rate of interest equal to the 10-year constant maturity Treasury securities yield rate for the first business day of the last month of the period to which the benefit statement relates.
Assumed Mortality: An administrator must use the unisex mortality table that is created and published by the Internal Revenue Service.
Special Rules for In-Plan Annuities and Deferred Income Annuities. The interim final regulations also provide guidance for plan administrators whose plans invest participants’ accrued benefits in annuities through contracts with licensed insurance companies or who purchase deferred income annuities during the benefit accumulation phase.
For those plans that offer in-plan distribution annuities, plan administrators will have the option of using the assumptions in the interim final regulations or the administrators may use the actual terms of the plan’s insurance contract (subject to some limitations).
There are separate disclosure requirements for those plans that offer deferred income annuities; however, any portion of an account that is not invested in a deferred income annuity needs to be disclosed according to the assumptions above.
Model Explanations and Liability Relief. Finally, the interim final regulations provide relief from ERISA liability for plan fiduciaries, sponsors and others so long as the illustrations in the benefit statements meet the requirements of the interim final regulations. In addition to making the illustrations according to the interim final regulations, administrators must also include model language from the interim final regulations, or language that is substantially similar to the language in the interim final regulations in participants’ benefit statements.
Effective Date. The rules set forth in the interim final regulations will become effective one year from the publication date of the final rules. Final rules will be published after the comment period on the interim final regulations are closed and the DOL has had a chance to review all public comments.