The Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) includes a requirement that benefit statements issued by ERISA-governed defined contributions plans include lifetime income illustrations and explanations. We previously discussed these rules, both generally and when the Department of Labor issued Interim Final Rules to implement the disclosure requirements.

The new disclosure rules do not depend upon whether or not a defined contribution plan offers annuities or lifetime income benefit options. In either case, the plan must estimate and disclose to each participant the periodic annuity benefit that can be provided through the participant’s defined contribution account balance. On July 26, 2021, the Department of Labor posted additional guidance confirming and clarifying certain aspects of the new rules.

When is the First Lifetime Income Illustration Required?

The effective date provision for the lifetime income disclosure rule is complicated. The SECURE Act provides that the requirement becomes effective one year after the Department of Labor issues rules on this subject. The Department of Labor did that on September 18, 2020, making the lifetime income disclosure requirements effective on September 18, 2021.

However, when is the first lifetime income illustration and explanation due? The rules require that a lifetime income illustration be provided at least annually with the first such illustration to be provided for a reporting period that ends no more than 12 months following the September 18, 2021 effective date of the new rules – in other words, for a reporting period that ends no later than September 18, 2022.

Thus, for a plan that operates on a calendar year basis and provides quarterly benefit statements, the lifetime income illustration and explanation must be provided no later than the statement for the quarter ending June 30, 2022, since this is the last quarterly statement reporting period that ends no later than September 18, 2022. In this case, waiting until the third or fourth quarter of 2022 will not be timely because each of those quarterly reporting periods ends after September 18, 2022.

Participant-directed defined contributions generally are required to provide benefit statements at least quarterly. For defined contribution plans that do not permit participant investment direction, the plan is permitted to issue annual, rather than quarterly, benefit statements. However, in this case, the first required lifetime income illustration will be in connection with the statement for the first plan year ending on or after September 18, 2021 – which, in the case of a calendar year plan, will be the statement for calendar year 2021. Waiting until the statement for the 2022 plan year in this example will not be timely because the reporting period ends after September 18, 2022.

May a Plan Provide Additional Lifetime Income Illustrations?

The rules require disclosure of what the participant’s current defined contribution balance will “purchase” in terms of a periodic annuity benefit. The illustration assumes that the participant is age 67 (or actual age, if older) and that the periodic annuity benefit commences on the last day of the statement period. The Department of Labor rules look only at the participant’s current account balance, without projecting that balance forward to reflect assumed future contributions or future investment return.

Some plans already include lifetime income illustrations or other disclosures that are designed to illustrate a participant’s progress toward retirement. The Department of Labor has stated that a plan sponsor is permitted to include additional retirement income illustrations, such as illustrations that project a participant’s account balance to normal retirement age. The key word here seems to be “additional.” While additional retirement income illustrations are permitted, the Department of Labor did not say that a plan sponsor might replace the required framework with an alternate illustration.

If they have not already done so, plan sponsors should begin discussions with their defined contribution record-keepers and vendors to understand how those providers intend to implement the new rules.