The Department of Labor’s lifetime income statement rule goes into effect in mid-September, except for one problem, there is no final rule.
The SECURE Act told the department to develop a rule requiring pension and retirement plan sponsors and their providers to give participants an annual statement illustrating the lifetime income that their money would provide.
That provision of the Setting Every Community Up for Retirement Enhancement Act of 2019 was well-received at the time, but that enthusiasm has dampened because the DOL issued an interim final rule that some say is misguided, and the department has not issued a final rule for plan advisors that would actually be helpful.
Fred Reish, ERISA lawyer and partner at Faegre Drinker, said the interim rule would have advisors providing irrelevant projections to clients because the income would be based on what a 67-year-old would receive on the money that is currently in an account, regardless of the participant’s age. In that scenario, a 25-year-old with $20,000 in their account would learn what income the money would provide a 67-year-old if the funds were annuitized on that day.
“In my opinion it’s not going to be particularly helpful, and if anything, it will be confusing,”
Reish said during Faegre Drinker Inside the Beltway webinar last week. “I think plan sponsors, providers and advisors should be thinking about how to deal with that now because I think it will take some education and explanation. If I were on a plan committee, I would want my advisor and my provider to be meeting with me to let me know what’s coming.”
The plan committee members would want to know if they should be providing alternative calculations, and they would want to know in the next three months, Reish said, because in some cases the requirement could be effective as early as Dec. 31.
The rule requires the statement in any 12-month period, so the first one would be needed at the end of the second quarter of 2022, a year from the effective date of Sept. 18.
In a recent FAQ, the DOL said the first statement would not be needed until the end of the second quarter of 2022, Reish said. Plan providers and participants might want to issue two illustrations in 2022, one mid-year and one after the end of the year to get on a calendar year schedule.
The DOL has been delayed because the Environmental, Social and Governance rule had a higher priority, which pushed back work on the rule and delayed appointment of a key assistant secretary position, Reish said.
‘Simplistic Bad Ideas’
Brad Campbell, also a Faegre Drinker partner and former DOL official, added that he knows from experience that the information the interim rule requires often is not useful. Campbell remembered getting lifetime income statements on his Thrift Savings Plan when he was a federal employee.
“Unfortunately, way too many simplistic bad ideas for the real 401k world come out of the government’s experience with its own very bare bones plan,” Campbell said, describing the annuity calculation he got annually, which was based on retiring in that year. “As a 30-year-old, I found that a really worthless projection. … I really think you need to project it forward to have some sort of more realistic balance.”
Because the Biden administration said that they will be drafting a final rule rather than relying on the interim regulation, Campbell said he had hope that they will be revisiting these details.
In the meantime, the DOL produced an FAQ that allows for other projections, Aithough they won’t get the benefit of safe harbor, Campbell said.
“I don’t think it’s going to achieve the goal that the Congress had in the SECURE Act,” Campbell said, “even though one could argue the DOL’s approach here may have actually been a faithful interpretation of what Congress wrote.”
Going with a more helpful projection might help plan participants, but only the government-sanctioned would provide fiduciary safe harbor, Reish said, adding that advisors and others have been asking if they would be liable if their projections did not hold up. After all, a projection issued this year would be thrown off by future contributions and conditions.
“Folks have been doing this for years, one particular provider’s been doing it for decades,” Reish said of projections. “Nobody’s ever filed any kind of a claim that I’m aware of. So, I just think people worry too much about the projections that don’t have a fiduciary safe harbor.”
Reish warned that the illustrations should include caveats are projections and not promises.
Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at firstname.lastname@example.org.
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