Retirement Plans Are Bracing for Changing Income Disclosure Rule

A U.S. Labor Department interim final rule requiring employers to issue retirement plan participants lifetime income illustrations is adding to concerns in the industry over the contents of the rule itself and the department’s repeatedly changing standards of disclosure.

Under the interim regulation that takes effect Sept. 18, plan sponsors must illustrate how participant savings will translate into monthly income later in life, no matter their age or if that money would grow over a career’s worth of saving. That’s a major point of contention for recordkeepers and financial advisers who say the disclosures would be useless or even confusing for younger participants.

But if the DOL substantially changes the underlying assumptions when it finalizes that rule, it would mark at least the third time U.S. retirement firms would have to retool their systems to comply.

As Sept. 18 approaches, federal regulators face a dilemma: Modify lifetime income standards once more or risk undermining the very purpose those standards are meant to serve, costing recordkeepers more time and money.

“That’s the key question,” said Arsalan Malik, a benefits attorney at Groom Law Group. “That’s the million-dollar question, actually, and a million dollars may not be enough. Given the effort to implement rules like this, I can see this costing much more than a million.”

Labor Department officials didn’t immediately respond to email requests for comment.

First Attempts

Lawmakers, regulators, participants, and employers like the idea of giving retirement savers information on how much money they will have to live on once they retire, Malik said. Congress members since 2008 have introduced several pieces of legislation that would require some kind of lifetime income illustration.

It wasn’t until 2013, however, that DOL’s Employee Benefits Security Administration issued an advance notice of proposed rulemaking that would have required plans to give notices based on a participant’s current balance and their projected balance at retirement.

The idea caught on quickly. Disclosures were expected to encourage healthy investing, and EBSA even published a retirement calculator on its website that plan sponsors and recordkeepers could use to determine a participant’s projected income based on the tentatively published assumptions. EBSA never officially proposed that rule, but that didn’t stop some recordkeepers from running with the idea and creating their own calculators.

Congress in 2019 passed a legislative package that required DOL to issue a proposed final rule on lifetime income that would take effect exactly one year later. The department under former President Donald Trump published the proposal on Sept. 18, 2020, setting up this month’s deadline. EBSA said it would publish a final rule before the interim final rule could take effect, but meeting that deadline seems unlikely, said Michael Del Conte, another Groom benefits attorney.

‘Static’ Assumptions

The interim final rule relies on a “static” assumption that whatever amount a participant has saved is suddenly transferred into an annuity laying out monthly payments. That’s probably not helpful to younger workers, said Rep. Richard Neal (D-Mass.) in a comment letter to DOL.

“From a financial and economic perspective, there is no basis for this assumption,” he said. “In my opinion, an assumption that a 31-year old will earn nothing on her account balance over the next 36 years is hardly an appropriate assumption.”

But recordkeepers who provide the software and behind-the-scenes calculations for plan sponsors have already begun to reconfigure their systems once more to provide plans with that “static” data.

“Recordkeepers will need to build systems that can pull this data from outside sources or will need to rely on human interaction to load the correct information,” said Jennifer DeLong, managing director and head of defined contribution at the asset management company AllianceBernstein LP.

Signal of Change

EBSA last month issued frequently asked questions clarifying when plan sponsors would need to issue their first disclosures under the interim rule. Participant-directed retirement plan sponsors that issue quarterly balance statements will have until the second calendar quarter of 2022, ending June 30, 2022, to include at least one illustration, and employers that control participant investments must include both illustrations on the annual statement for the first plan year ending on or after Sept. 19, 2021. For most calendar-year plans, that time frame extends to Oct. 15, 2022.

The department said it appreciates concerns about the burdens that could arise if the final rule differs materially from the interim rule without a sufficient transition period, but that it would issue the final regulation “as soon as practicable based on feedback from comments received” for the interim final rule.

Brad Campbell, a benefits attorney at Faegre Drinker Biddle & Reath LLP and a former EBSA chief, said he believes the agency is likely signaling it will change the rule enough to modify those assumptions. But if it does, recordkeepers will have another big job ahead of them.

“How far can the department diverge from the interim final rule in its final rule?” said Malik. “One would hope that the department makes some changes to address the comments, but people have already geared up their systems based on the interim final rule.”