One of the architects of the SECURE Act is unhappy about how the Department of Labor is implementing the lifetime income illustrations for 401(k)s mandated by the new law.
Sen. Richard Neal, D-Mass., who sponsored the legislation that was ultimately passed in 2019 as part of a spending bill, is taking issue with a major assumption that could be used to present the annuity-like estimates of lifetime income on annual plan statements.
Under the interim final rule from the DOL, the current value of account balances would be used to provide such estimates, with the assumption that every participant is 67 years old and ready to retire.
“For most of us, $100,000 seems like a tremendous amount of money. However, when you project what that means in terms of a monthly benefit in retirement, depending on your age that may only mean a few hundred dollars per month,” Neal wrote in a comment letter to the DOL.
“I was disappointed in the recently issued interim final rules implementing this provision,” Neal wrote. “Under the rules, the projection must assume that an employee is age 67 (or the employee’s actual age if older). So, for example, a 31-year old is assumed to be age 67. The effect of this is that her retirement income is estimated as if her account balance at age 31 will earn nothing from age 31 to age 67, resulting in a far smaller estimate of her lifetime income than is realistic.”
It would be more realistic to assume even a 4% rate of return, which would result in an account balance four times higher for a 31 year old by age 67, and thus a much higher lifetime income estimate, Neal stated.
The senator raised his concerns in September, shortly after the DOL published the interim rule. Comments on that proposal were due Nov. 17, which is when most of the letters came in.
The DOL lifetime income rule goes into effect on Sept. 18, 2021 and will apply to annual retirement plan statements sent to participants after that date.
Industry lobbyists and trade groups agreed with provisions in the proposed rule, suggesting minor changes with some of the underlying assumptions and requirements for employers. Generally, supporters asked to keep requirements simple.
The DOL proposed the rule in August, outlining interest rate, life expectancy and retirement-age assumptions. It also provided a model disclaimer for account statements that would give plan sponsors liability protection.
Lifetime income projections have been seen as a way for annuities to make inroads in 401(k)s. Although plan sponsors have not been moving quickly to add annuities in the wake of the SECURE Act, the fact that participants will eventually see annuity-like estimates on their statements could make them more familiar with the insurance products.
The DOL could revise some parts of the rule to address issues. But as written, it will require plans to express account balances as monthly income payments from both single life and qualified joint and survivor annuities.
The interest rate used in calculating that will be the 10-year constant maturity Treasury yield rate, which life insurance and annuity providers find consistent with commercial annuity pricing, the DOL wrote.
One commenter, the AARP, asked the DOL to require a second set of estimates, using age 62 in addition to 67. While the average age of application for Social Security is rising and now close to 65, women tend to apply for it at earlier ages than men, the AARP wrote. Further, more than a quarter of applications are filed by people at 62, the group stated.
The AARP also asked that the disclosures specify whether the plan provides an annuity option for participants or whether they must look outside of the plan for one.
The Insured Retirement Institute asked for more fiduciary liability protection for plans that opt to include more income projections on participant notices than the DOL requires.
“We ask the Department to explicitly acknowledge and affirm that such supplemental illustrations and educational tools would be treated as investment education and not financial advice,” the IRI’s letter read.
Another issue on which the DOL sought input was whether to include “insurance load” costs in the lifetime income calculations. That would factor in “the difference between the market price of lifetime income and the price of actuarially fair lifetime income” and can include “an allowance for an insurance company’s profits, costs of insuring against systemic mortality risk, costs of holding cash reserves, advertising” and other costs, according to the DOL.
The American Council of Life Insurers recommended against adding insurance load criteria to the DOL’s rule, “as doing so would result in conversions at rates below current immediate payout annuity purchase rates to the extent of such load factor,” that group stated in its comment letter.
As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.