Employer groups weigh in on proposed lifetime income disclosure rules

In comments to the Labor Department on its advance notice of proposed rulemaking concerning the reporting of lifetime income streams, major employer groups stressed flexibility and the individualizing of retirement assumptions. The advance proposed rules, which were issued in May 2013, describe 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.

Individualizing statements encouraged

To enhance the current proposed rule, the American Society of Pension Professionals & Actuaries (ASPPA) recommended that a lifetime income disclosure be focused and concise. ASPPA recommended that the estimates be calculated using 3%, 5%, and 7% as the three nominal rates of return to provide useful information without overloading the benefit statement. The calculation should be done without any assumption that there will be future contributions by the employer or the employee, because future contributions are rarely guaranteed, ASPPA said.

ASPPA also recommended that the proposal include a “safe harbor” that may be relied upon by plan sponsors for the assumptions used in calculating the lifetime income stream and that those assumptions be modified in several ways to facilitate the disclosure regime in a cost-effective manner. Among these recommended modifications are setting the time period for the projection as a static age and limiting the form of distribution to a single life annuity and a 50% joint and survivor annuity for a spouse of the same age, to make results across multiple plan sponsors more consistent.

Finally, ASPPA recommended that the DOL’s online calculator be enhanced to be more educational and to allow consideration of many different assumptions including retirement assets held outside of the plan, such as in an IRA. The use of an enhanced DOL calculator or the use of a private service provider online calculator should then be encouraged so participants can individualize the assumptions used to calculate potential lifetime income distribution streams, ASPPA said.

Flexibility urged

In its comment letter, the ERISA Industry Committee (ERIC) proposed alternatives that it contended would be more effective than the approach described in the advance proposed rules. ERIC recommended that the DOL instead: (1) promote a voluntary system with flexible guidance based on broad principles that will encourage innovation and (2) encourage the use of online modeling tools, which will allow workers to explore a variety of scenarios based on their individual situations.

“Instead of paper disclosures, the Department should promote the use of online modeling tools. These dynamic tools would allow participants to generate more realistic projections for their scenarios, encourage action, and demonstrate interactively the uncertainty inherent in any projection,” said Kathryn Ricard, ERIC senior vice president for retirement policy.

The Plan Sponsor Council of America (PSCA) also urged a voluntary approach. In its comment letter, the PSCA emphasized its opposition to a mandate to provide a lifetime income illustration. Given the broad availability of retirement calculators, the cost-benefit analysis does not favor a new mandate, which would create new costs and fiduciary liability exposure, the PSCA stated.

Furthermore, the PSCA contended that the safe harbor in the advance proposal would result in “a major reduction in the availability of other retirement income calculators to the detriment of participants.”

In its letter, the PSCA said that “[o]ur members have indicated that if the intended rule were promulgated, they would provide the safe harbor disclosures.” Furthermore, the letter states, “they would deny access, on the plan platform, to any other retirement income calculator because they use different assumptions than those in the safe harbor and might expose plan fiduciaries to increased liability.”

According to the PSCA, the safe harbor is, by necessity, the lowest common denominator provision. The lifetime income illustrations produced under the safe harbor will be “much less robust” than those produced by available retirement income calculators that often consider other retirement assets, spousal income, joint benefits, and variable income growth, contribution rates, retirement date, and earnings, said the PSCA.

Source: PSCA letter, August 6, 2013. ASPPA news release, August 7, 2013. ERIC news release, August 7, 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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