EBSA issues advance notice of proposed regs on reporting of lifetime income streams

The Labor Department’s Employee Benefits Security Administration (EBSA) has issued an advance notice of proposed rulemaking describing guidance under consideration that would require the accrued benefits in a participant’s defined contribution plan (e.g., a 401(k) or 403(b) plan) to be expressed on the pension benefit statement as an estimated lifetime stream of benefits in addition to being presented as an account balance. The advance notice serves as a request for comments on specific language and concepts in advance of the issuance of proposed regulations. Comments are due by July 8, 2013.

The advance notice provides an opportunity for stakeholders to provide early input into the development of regulations, the Labor Department said. “We are looking for the best ideas on how to show people what their lump-sum retirement savings look like when they are spread out over all the years of retirement,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Retirees run the risk of outliving their savings. If workers have the benefit of seeing how long their savings could last, it might spur better planning for the future, such as adopting more effective savings strategies.”

Pension benefit statement

ERISA §105 requires administrators of defined contribution plans to provide periodic pension benefit statements. Benefit statements must be furnished at least annually, unless the plan is a participant-directed plan, in which case benefit statements must be furnished at least quarterly. Benefit statements must show the participant’s “total benefits accrued.”

As the Labor Department has noted, employees today face greater responsibility for managing their assets for retirement, both while employed and during their retirement years. This greater responsibility is primarily a result of the trend away from defined benefit plans, where an employee’s retirement benefit is typically a specified monthly payment for life, and toward defined contribution plans, where typically contribution, asset allocation, and drawdown decisions are assigned to the participant. As a general policy, EBSA believes that expressing a participant’s current and projected account balances as lifetime income streams would allow participants to make more informed retirement planning decisions.

Projecting lifetime income stream

The advance notice of proposed rulemaking sets forth certain language and concepts that EBSA is considering as part of future proposed regulations. The language and concepts being considered are limited to pension benefit statements of defined contribution plans. The language and concepts would be part of the regulatory framework of ERISA §105 under which:

• A participant’s pension benefit statement would show his or her current account balance and an estimated lifetime income stream of payments based on such balance.

• For a participant who has not yet reached normal retirement age, his or her pension benefit statement also would show a projected account balance and the estimated lifetime income stream based on such balance.

• Both lifetime income streams (i.e., the one based on the current account balance and the one based on the projected account balance) would be presented as estimated monthly payments based on the expected mortality of the participant or beneficiary.

• Pension benefit statements would contain an understandable explanation of the assumptions behind the lifetime income stream illustrations.

Safe harbors

The advance proposed rules require that plan administrators use only “reasonable assumptions taking into account generally accepted investment theories.” The advance rules, however, provide two safe harbors under which certain assumptions would be deemed reasonable.

Under the “projection safe harbor,” when projecting account balances, it would be reasonable for a plan administrator to assume: (1) contributions continue to normal retirement age at the current annual dollar amount, increased at a rate of 3% per year, (2) investment returns are 7% per year (nominal), and (3) a discount rate of 3% per year, in order to show the projected account balance in today’s dollars.

Under the “conversion safe harbor,” when converting current and projected account balances into lifetime income streams, it would be reasonable for a plan administrator to assume: (1) a rate of interest equal to the 10-year constant maturity Treasury securities rate, (2) mortality as reflected in the applicable mortality table under Code Sec. 417(e)(3)(B), (3) if married, the participant’s spouse is the same age as the participant, and (4) payments commence immediately and the participant is normal retirement age, if younger than normal retirement age.

Note: In conjunction with the publication of the advance notice of proposed rulemaking, EBSA has also made available on its website an interactive calculator that computes lifetime income streams in accordance with the proposed regulatory framework. The calculator is at www.dol.gov/ebsa/regs/lifetimeincomecalculator.html.

Source: 78 FR 26727, May 8, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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