PLANADVISER - March/April 2021 - 38

ERISA vista
Fred Reish and Joan Neri
Lifetime Income Illustrations
Preparing committees for this SECURE Act requirement
ADVISER QUESTION: I'm an RIA [registered investment
adviser] who advises 401(k) plan committees. I know that the
SECURE [Setting Every Community Up for Retirement Enhancement]
Act included a requirement that 401(k) plans provide
participants with annual lifetime income illustrations. When
does that rule apply, and what should I be telling plan
committees about that obligation?
ANSWER: The first of the annual lifetime income illustrations
must be provided in participant benefit statements
beginning after this September 18. We suspect that many
plans will provide them in this year's December 31 statements.
There are a number of considerations that you should
highlight to plan committees, including whether additional
services are required to help participants understand the
illustrations and apply them to their specific circumstances.
You may be able to assist with some of those services.
Under the Employee Retirement Income Security Act
(ERISA), the plan administrator-in most cases, a plan
committee-has the fiduciary obligation to provide participant
benefit statements that contain the lifetime income
illustrations. But, as a practical matter, the plan recordkeeper
or other service provider will usually develop and deliver the
illustrations to participants as part of their statements. In
that case, the plan committee's role will be to review the
illustrations to make sure they comply with the rules.
The Department of Labor (DOL) guidance, which is
in an interim final regulation, describes how the illustration
must be calculated in order for the plan committee,
as the fiduciary administrator, to be protected, under the
safe harbor, against a claim that the illustrations were
inaccurate. The illustration must show the value of the
participant's account balance as of the last day of the statement
period. That account balance must be expressed as a
lifetime stream commencing on the last day of the statement
period as follows: as a single life annuity-i.e., equal
monthly payments for the life of the participant; and as a
joint and survivor annuity-i.e., equal monthly payments
for the joint lives of the participant and spouse.
The regulation describes the interest rate, life expectancy
and other assumptions that need to be used for these
illustrations. For instance, the participant is assumed to
be age 67; if he is older than 67, then his actual age must
be used. Also, a participant is assumed to be married to a
spouse of the same age, and the survivor annuity percentage
is assumed to be equal to 100%-i.e., the spouse would
receive the same amounts as the participant. The assumptions
must be explained in an understandable manner on
the participant statement. For the sponsor to be protected
under the safe harbor, it must use the model language
contained in the regulation to explain the assumptions.
The regulation does not prevent a plan from providing
additional lifetime income illustrations on the statement as
long as they are not misleading to participants. However, such
illustrations will not qualify for liability relief under the safe
harbor. Therefore, if additional illustrations will be presented,
the committee should use an experienced service provider to
develop projections based on reasonable assumptions.
Committees should consider the impact of the mandated
illustrations on participants and ways by which the plan
can support participant needs. These include:
Participant education. Participants need to understand
the illustrations and the assumptions used. The illustrations
may be particularly confusing to young participants-
e.g., a 30-year-old who is assumed to be 67 on December
31, 2021. In addition, participants need to understand how
the illustrations can be affected by factors such as market
conditions and future contributions.
Expanded plan distribution options. A committee
could consider changes that offer retirees more flexibility
in meeting their retirement needs. For instance, a plan
could offer distribution options that include systematic
withdrawal payments and special distributions for unexpected
needs.
Gap analysis services. There are benchmarks and tools
that can calculate whether a " typical " participant is projected
to meet his retirement income requirements. These services
can provide a gap analysis that evaluates the participant's
current retirement savings and suggests a strategy to put the
individual on course for a secure retirement.
In your role as adviser, you can discuss these issues and
additional services with your committees. You may be able to
provide some services directly-e.g., educating participants
about the projections-or, alternatively, help the committees
select an outside provider to perform those services.
Fred Reish is chairman of the financial services ERISA practice at
law firm Faegre Drinker Biddle & Reath LLP. Joan Neri, a nationally
recognized expert in employee benefits law, is counsel in the firm's
financial services ERISA practice, where she focuses on all aspects
of ERISA compliance affecting registered investment advisers and
other plan service providers.
38 | planadviser.com March-April 2021 Art by Tim Bower
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PLANADVISER - March/April 2021

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