New Information on Participant Statements: Lifetime Income Illustrations

May 10, 2022

If you sponsor a defined contribution retirement plan, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 now requires additional information be provided to your plan participants on their quarterly account statements. Along with their current account balance, two lifetime income illustrations must now be included once a year. This is intended to help your plan participants understand their current account balance in terms of what it means for them at retirement so they can be better prepared.When is this required to start?

The Act’s interim final rule was issued on 9/18/21 and the first illustration must be provided within 12 months of that date. The start date will depend on the type of accounts included in your plan.

  • Participant-directed accounts which receive quarterly benefit statements: Illustrations must be included on the 6/30/22 quarterly statement (if not already provided on the 3/31/22 statement).
  • Non-participant-directed accounts: Illustrations must be included on the statement for the first plan year ending on or after 9/19/21 and must be furnished no later than the filing of the annual return for that year. For calendar year plans, this will be the 12/31/21 statement, furnished no later than 10/15/22.

What illustrations are required?

The following will be provided regardless of the participant’s actual marital status:

  • A single life annuity (SLA): This will show a fixed monthly amount for the life of the participant, with no surviving benefit to a spouse after their death.
  • A qualified joint and 100% survivor annuity (QJSA): This will show a fixed monthly amount for the life of the participant, and the same fixed monthly amount to the surviving spouse after the participant’s death.

What assumptions are used for the illustrations?

Age: 67 (or actual age, if older)

Interest rate: 10-year Constant Maturity Treasury rate (10-year CMT) as of the first business day of the last month of the statement period. The 10-year CMT approximates the rate used by the insurance industry to price immediate annuities.

Mortality table: Gender neutral mortality table in section 417(e)(3)(B) of the Internal Revenue Code. This is the table generally used to determine lump-sum cash-outs from defined benefit plans.This is a sample illustration provided by DOL:

Facts: Participant X is age 40 and single. Her account balance on December 31, 2022 is $125,000. The 10-year CMT rate is 1.83% per annum on the first business day of December.The benefit statement of this participant would show:

Current Account Balance: $125,000

Single Life Annuity: $645 per month for life (assuming Participant X is age 67 on December 31, 2022)

Qualified Joint and 100% Annuity: $533 per month for participant’s life and $533 for the life of spouse following participant’s death (assuming Participant X and her hypothetical spouse are age 67 on December 31, 2022). Source: does this mean for you as plan sponsor?

Does your plan have to offer annuities? No, the normal form of distributions will still follow your current plan provisions. If your plan does offer annuities as a distribution option, you have options regarding which interest rate assumption to use. However, you will still need to assume age 67 (unless older), assume the spouse and participant are the same age, and show both the SLA and QJSA options.

Will the plan sponsor and fiduciary be liable if the payments at retirement are not as illustrated? No, as long as:

1) the illustrations are based on the DOL assumptions and

2) the illustrations on the statements use the DOL model language (or similar language). The model language will help explain how the calculations were prepared and that they are illustrative and not guaranteed.

Your participants may have questions about the illustrations, especially since the age, gender, and marital status used may differ from their actual situation. The illustrations also only consider the current account balance, not additional contributions and earnings that may be added to that balance over time. Recordkeepers and investment advisors (used by the plan for the participants or the participants’ own personal advisors) will be able to provide additional information since these illustrations may differ from what the participants have seen previously when estimating their future retirement benefits. Participants will need to consider all applicable information that pertains to their personal financial situation. This new requirement, though, is just one more piece of information that hopefully enables them to take additional steps to plan for a successful retirement.

This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.

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