In a Nov. 17 comment letter on the Department of Labor’s (DOL) interim final rule on lifetime income illustrations (LIIs), the American Retirement Association offers support for the rule, but recommends changes in certain key areas.
“The ARA believes that the IFR strikes the right balance with focused requirements that will provide participants and beneficiaries with the useful information while limiting the costs and burdens of plan administration,” the letter states.
Moreover, even though the LIIs will be produced using the rule’s uniform set of assumptions, making them less individualized than what some service providers may offer, the ARA believes the illustrations will, nonetheless, provide participants with an informative look at potential future monthly retirement income.
The DOL rule, published in the Federal Register Sept. 18, came in response to the SECURE Act’s requirement for benefit statements to include a lifetime income disclosure containing “the lifetime income stream equivalent of the total benefits accrued with respect to the participant or beneficiary.”
Keep it Simple
The ARA’s letter notes that, while there are shortcomings to the IFR’s simplified approach, without specific guidelines plans tasked with calculating lifetime income illustrations may choose assumptions that could result in “dramatically different outcome projections, potentially confusing or misleading participants with regard to their retirement preparations.”
As to whether the final rule should require illustrations based on multiple ages rather than a single age, the ARA contends that using a single uniform age balances the participants’ need for information with efficient administrability of providing the required illustrations. “Indeed, we recommend that the rules require using age 67 regardless of the participant’s actual age. The simplicity of this approach correlates with the practicability that Congress had in mind,” the letter argues. Moreover, it notes that service providers generating LIIs may not have records of actual birth dates and requiring actual ages for participants would add considerable cost and complexity.
Inflation Adjustment
As to whether the IFR should require illustrations that factor in inflation, the ARA believes that the maximum benefits of the rule’s approach—of not adjusting for inflation—lie in its “conceptual and administrative simplicity,” which correlate with utility and practicability. “Thus, we urge against requiring complex calculations such as adjustments for inflation for what optimally should be a concise and practicable illustration,” says the ARA.
That said, the letter further suggests that the LIIs should explain that the fixed nominal annuitized income streams present will have declining purchasing power over time—that is, it should be made clear that the LIIs are predicting the actual anticipated stream of payments.
As such, the ARA suggests prominent placement of the rule’s explanation that the monthly payment amounts in the LIIs “are fixed amounts that would not increase with inflation” and that “as prices increase over time, the fixed monthly payments will buy fewer goods and services.”
Loans
The ARA further requests clarification of the rule’s requirement that the determination of a participant’s account balance include the outstanding balance of any participant loans unless the participant is in default of repayment on such loan. The ARA questions, for example, whether only loans that have been offset are to be disregarded from the account balance, or alternatively, does a default of repayment include instances where a loan is treated as a deemed distribution or when payments were not made by the end of the cure period under the plan.
Fiduciary Liability
The ARA also welcomes the relief from ERISA fiduciary liability in connection with providing LIIs conditioned on use of the IFR’s model language or language that is substantially similar in all material respects.
“We believe that this is likely to facilitate a cost-effective process while meeting the needs of participants for basic information,” the letter states. “We also believe this would go a long way toward mitigating historical fiduciary concerns regarding providing this type information in that plans would not be exposed to litigation due to participants’ unmet expectations or viewing them as promises or guarantees of a specific income stream.”
The ARA does cite concerns that by creating a safe harbor for these DOL-prescribed disclosures, there may be a perception that other disclosures (for example, those made in connection with website planning tools) may result in fiduciary liability simply because they have not been accorded a comparable safe harbor status.
Timing
Among the ARA’s recommendations is that the timing of the first benefit statement that is required to include a LII be clairified. The IFR is effective on Sept. 18, 2021, and applies to pension benefit statements furnished after such date. Since the LII must only be included in one pension benefit statement during any one 12-month period, the ARA recommends that the first benefit statement that must include a LII should be in the second quarter of 2022.
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