SECURE ACT and life income disclosure-can’t wait.

Here is the text of the Secure Act legislation regarding reporting life income projection to plan participants. I can’t wait for the regulations on this one, not to mention the potential confusion it will cause among participants.

Let’s see those assumptions‼️

Of course, you can … right now … take your anticipated fund balance and put that amount into an immediate annuity calculator and get the same level of accuracy for an estimate.

“EXPLANATION OF PROVISION

The provision requires a benefit statement provided to a defined contribution plan participant to include a lifetime income disclosure as described in the provision. However, the lifetime income disclosure is required to be included in only one benefit statement during any 12-month period.

A lifetime income disclosure is required to set forth the lifetime income stream equivalent of the participant’s total account balance under the plan. The lifetime income stream equivalent to the account balance is the amount of monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, based on assumptions specified in guidance prescribed by the Secretary of Labor (referred to as the ‘‘Secretary’’ in this explanation). The required lifetime income streams are (1) a qualified joint and survivor annuity for the participant and the participant’s surviving spouse, based on assumptions specified in guidance, including the assumption that the participant has a spouse of equal age, and (2) a single life annuity. The lifetime income streams may have a term certain or other features to the extent permitted under guidance.

The Secretary is directed to issue, not later than a year after the provision is enacted, a model lifetime income disclosure, written in a manner to be understood by the average plan participant. The model must include provisions to (1) explain that the lifetime income stream equivalent is only provided as an illustration, (2) explains that the actual payments under the lifetime income stream that may be purchased with the account balance will depend on numerous factors and may vary substantially from the lifetime income stream equivalent in the disclosure, (3) explain the assumptions on which the lifetime income stream equivalent is deter- mined, and (4) provides other similar explanations as the Secretary considers appropriate.

In addition, the Secretary is directed, not later than a year after the provision is enacted, (1) to prescribe assumptions that defined contribution plan administrators may use in converting account balances into lifetime income stream equivalents, and (2) issue interim final rules under the provision. In prescribing assumptions, the Secretary may prescribe a single set of specific assumptions (in which case the Secretary may issue tables or factors that facilitate conversions of account balances) or ranges of permissible assumptions. To the extent that an account balance is or may be invested in a lifetime income stream, the prescribed assumptions are to allow, to the extent appropriate, plan administrators to use the amounts payable under the lifetime income stream as a lifetime in- come stream equivalent.

Under the provision, no plan fiduciary, plan sponsor, or other person has any liability under ERISA solely by reason of the provision of lifetime income stream equivalents that are derived in accordance with the assumptions and guidance under the provision and that include the explanations contained in model disclosure. This protection applies without regard to whether the lifetime income stream equivalent is required to be provided.

EFFECTIVE DATE

The requirement to provide a lifetime income disclosure applies with respect to benefit statements provided more than 12 months after the latest of the issuance by the Secretary of (1) interim final rules, (2) the model disclosure, or (3) prescribed assumptions.”

2 comments

  1. One retirement industry professional supports the SECURE Act mandated disclosure. (M. Barry, Barry’s Pickings: We Need Standardized Lifetime Income Disclosure, ASAP, https://www.plansponsor.com/exclusives/barrys-pickings-need-standardized-lifetime-income-disclosure-asap/)

    He concludes: “The simplest, least confusing and best way to present this information is to tell the participant what sort of age-65 life annuity he or she could buy with his/her current account balance.”

    Well, a projection of an age 65 annuity will almost always be inaccurate. Period-to-period changes in estimates will be hyper confusing to everyday plan participants. Confusion will be compounded for participants who receive multiple disclosures – from current and prior employer-sponsored plans. Just as important, the proposed mandated disclosure only applies to employer-sponsored plans subject to ERISA. It won’t apply to a considerable portion of the accumulated retirement savings invested in Individual Retirement Accounts (IRAs) nor other plans not subject to ERISA. Those accounts will only reflect cash balances.

    For example, unless the employer-sponsored plan subject to ERISA includes an annuity payout option with unisex provisions, the same account balance won’t provide a woman the same amount of life annuity as it would for a man.

    What would have happened had this mandated disclosure been implemented 40 years ago, when the first 401(k) plans were introduced, and many of today’s age 65 retirees first started to save? The early 80’s were a period where life expectancy was noticeably less, and interest rates were dramatically higher. So, assuming the disclosure was repeatedly updated with each quarterly statement or once a year to reflect changes in annuity purchase rates (as well as contributions, investment performance, turnover, new enrollments, distributions and rollovers to IRAs, hardship distributions, etc.), the estimated age 65 payment amount would have fluctuated dramatically. The result would be anything but simple and informative. And, participants might have been so misled by the disclosure, particularly if it included an assumption that participation would continue until age 65, that they would have REDUCED, not increased their savings rate (higher interest rates and lower life expectancy result in a higher monthly income). As they went through the past 40 years, the projected monthly income their ever-increasing account balance would generate would DECLINE, not increase. Period-to-period changes in the annuity would certainly be confusing to the point of misleading to almost all everyday plan participants. And, as a result, the retirement income estimate would have no value for participants who will want to rely on those projections in their savings and payout decision-making.

    The author of that article has as his goal “standardized, simple, and least confusing”. That is easy. There is already a retirement savings individual account distribution mandate in place today – enforced by a 50% tax for non-compliance. It is called required minimum distributions (RMD). If you want a standardized, simple, least confusing disclosure, have each employer-sponsored plan (whether subject to ERISA or not) and every IRA show what the account balance would provide as a stream of income as if the individual were age 70 ½ today (that is changing to age 72 starting January 1, 2020) (such an estimate assumes current dollars, that earnings on investments would fully offset inflation). The projection would show a residual account balance at some age, perhaps starting with 100.

    RMD disclosure is best if the goal is a standardized, simple, disclosure that is as least confusing as possible in that:
    • It would trigger a one-time expense, updated only when IRC §401(a)(9) requirements change;
    • There would be no confusing, period to period changes;
    • The sum of the payouts would always equal the account balance;
    • It requires no projection of inflation or interest rates;
    • The number would be the same regardless of the taxation of the account balance (taxable, return of after-tax contributions, Roth contributions and earnings thereon); and
    • The number would be the same for every individual born on the same day, regardless of the type of plan or IRA, the service provider, the plan advisor, or the plan sponsor.

    This form of estimate would also trigger a realization that inflation affects accumulated savings.

    So, the account balance, coupled with an RMD calculation would clearly reflect only the impact of added contributions and investment performance. Further, upon separation, a rollover to an IRA (or to a subsequent employer-sponsored plan) would not impact the estimated income stream.

    Best?

    I certainly agree that the best estimate = a standardized, simple, and least confusing communication. So, best is clearly cash, expressed in current dollars. That is because many participants have retirement savings outside of IRAs or employer-sponsored plans subject to ERISA.

    However, if the goal is a standardized, simple, least confusing lifetime income communication, the RMD display is best. Here’s why:
    • See the above list for simple, standardized, and least confusing – reflecting the existing mandate and applicable in the same way to all retirement savings accumulations;
    • Almost all service and product providers are already using software, administration to make distributions to comply with RMD;
    • More and more individuals are working beyond age 65;
    • Most workers have multiple employers during their working careers, with diverse plans; so
    • The participant could simply add the income streams.

    Remember, we are talking about everyday American workers with multiple accounts, varied disclosures over a period of 40, 50, 60, 70 years (including 10, 20, 30 years in retirement); many will also receive the spouse’s disclosures, also reflecting multiple accounts.

    Standardized, simple, least confusing, best – you can do that. You don’t need a government mandate providing a misleading estimate that encourages you to buy an annuity, favoring one form of payout over another (where an annuity may not be best for you).

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  2. And then there is the question of how years of estate planning may have just gone out the window for some people (me). If there was any money left when I die, it was to be used as seed money for my grandkids IRAs but now that may have to be changed since it will require them to RMD over 10 years so that the money can be taxed.

    Questionable annuity products will now be sold to people that do not understand them or their costs (not me). My 86 year old mother-in-law was almost talked into buying an annuity with a two year delay in payments and the insurance company got to keep the balance upon her death. But it is guaranteed income. This was a few years ago and I was able to talk her out of it. Anybody who sell on commission does not have your best interest.

    I always expected the government to change the rules. I am waiting for them to tax Roth IRAs because the government wants your money.

    A lot of experts have suggestions on what to do and what you should have done. I think it will be a few years after the regulations are in place to see what will really would be best or should have been the right thing to do.

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