Lifetime Income illustrations

[Micheleciz]

Under the SECURE Act, Lifetime Income Illustrations are required to be provided to participants in participant-directed plans.  The first illustration is due on any quarterly statement up to June 30, 2022.  For plans on platforms such as Voya or the American Funds, the fund company is providing this illustration.  How is anyone handling the illustrations for participants self-directing in brokerage accounts?

[Lou S.]

Send an annual illustration to the client with the year end work.

[LMK TPA]

Does a statement need to be sent before 6/30/22?  That's what I'm concerned about - not getting the info from the client in time to send a statement by 6/30.

[Lou S.]

See FAQ - Q2 https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/temporary-implementing-faqs-lifetime-income-interim-final-rule.pdf

For calendar year plans you would potentially have up until 10/15/2022 to distribute for 12/31/2021.

 

[Peter Gulia]

About timeline questions:

If the plan has “participants self-directing in brokerage accounts”, presumably the plan provides participant-directed investment.

If so, ERISA § 105(a)(1)(A)(i) calls for statements at least quarter-yearly, rather than yearly.

Even if one relies on EBSA’s non-rule guidance, relating a lifetime-income illustration to a statement for a period ended September 30, 2022 would be too late. Rather, the guidance assumes a June 30, 2022 statement is the latest that enables a plan’s administrator to furnish the required disclosure in a 12-month period from the rule’s September 18, 2021 effective date. (If a plan furnishes monthly statements, one might consider a July or August statement.)

To meet CDA TPA’s worry about whether necessary information will have been gathered when someone must generate a lifetime-income illustration and someone must furnish it, a plan’s administrator might want its lawyer’s advice about when the required disclosure must be delivered.

Would an illustration generated from a participant’s June 30, 2022 balance delivered before September 18, 2022 be enough to meet ERISA § 105(a)(2)(B)(iii)?

This post asks a question a plan’s administrator might explore with an expert lawyer’s help. It might not reflect advice I would provide if a client asks.

Consider also that ERISA § 105(a)(2)(B)(iii) is just one aspect of a much wider set of a plan administrator’s duties to communicate information a statute prescribes or the fiduciary knows (or a prudent fiduciary using the caution, care, skill, and diligence ERISA § 404(a)(1) requires would know) a participant or beneficiary needs to protect her interests.

And returning to Micheleciz’s question about some illustrations a plan’s administrator has not contracted another service provider to compile:

Is it a good (or bad) idea for a TPA to offer a service of compiling lifetime-income illustrations?

Which facts or circumstances make it a good idea? Which facts or circumstances make it a bad idea?

If you prefer to provide your service in a non-discretionary format so the TPA is not a fiduciary (or at least not for that service), what instructions would you want from the plan’s administrator so you could defend that you did not exercise any discretion?

[austin3515]

When you are doing the 6/30/2022 statement, are we clear that it can reflect your 12/31/2021 balance?  It would seem to me the 6/30/2022 statement should reflect your 6/30/2022 balance.  What about a new participant who rolled $300,000 in on April 1, 2022?  They're not going to get their 6/30/2022 statement.

 

[austin3515]

And if it has to be based on the 6/30/2022 balance well then forget it.  i.e., it just doesn;t seem the least bit feasible.

[Peter Gulia]

EBSA’s nonrule guidance says June 30, 2022 is the latest quarter-yearly close that ends with time for a delivery before September 18, 2022.

But a plan’s administrator might want its lawyer’s advice about whether a summertime or autumn revision of a previously delivered March 31, 2022, December 31, 2021, or September 30, 2021 benefit statement to add a corresponding lifetime-income illustration could suffice to meet ERISA § 105(a)(2)(B)(iii).

Perhaps a plan's administrator might find that delivering (before September 18, 2022) a stale illustration generated on a not-most-recent account balance might be less wrong than delivering no illustration.

[austin3515]

How they did not think to address this would be absolutely mind boggling if I hadn't been working in this industry for 20+ years.

[Peter Gulia]

Congress enacted the statute in 2019, and the Labor department published the rule on September 18, 2020 (more quickly than Congress directed). Employers have had more than two years in which one could have asked service providers whether they will offer a service to help an employer/administrator meet its duty. And service providers have had at least the past eighteen months in which one could have designed or bought software and designed work methods to generate the illustrations.

But if the worry is that a plan’s administrator might not know (or communicate) a participant’s account balance until months after the date of the account balance, that’s not a weakness in the government’s rulemaking. That’s a weakness in the plan’s administration.

I’m aware a TPA or other service provider might feel frustrated in dealing with a client or customer that doesn’t prudently administer its plan.

I look for solutions. Ideas I’ve mentioned here are just a few of many ways an employer/administrator might recover from its inattention.

[austin3515]

Peter are you aware that these plans have like 4 people on average? You talk as though their director of  hr dropped the ball.

and the issue isnt generating the numbers; all the software vendors have their reports. And you pointed out that we have until 9/18 probably (thank you for that).  But even then we would be sending out 12/31-21 statements.  And if you think it’s our fault or the clients fault that we can’t do this with 6/30/22 statements then you probably just don’t understand this model and what it takes to transform a filing cabinet with monthly statements into a reasonable source level statement with vesting updated etc.

[Peter Gulia]

Yes, I’m aware many small-business retirement plans operate with little or no internal resources of the employer that serves as the plan’s administrator (and often the plan’s only fiduciary).

And I’ve had hands-on experience doing the unautomated work you describe. In the 1980s, I worked in allocating a plan’s subtrusts’ investment results by hand, doing calculations on a hand-held calculator, posting journals’ entries and offsetting entries in old-fashioned ledger books, and typing participants’ statements on an IBM Selectric typewriter.

A need for the work you describe should suggest to a resource-constrained fiduciary that it’s imprudent to allow the off-system investment alternatives that result in a need for that work.

I certainly don’t fault TPAs. If anything, many TPAs provide advice about what an employer/administrator is missing.

And while one waits for an employer to change a plan’s investment alternatives and administration: If a June 30, 2022 account balance isn’t available, why not run the first lifetime-income illustration on the December 31, 2021 balance?

[austin3515]

6 hours ago, Peter Gulia said:

And while one waits for an employer to change a plan’s investment alternatives and administration: If a June 30, 2022 account balance isn’t available, why not run the first lifetime-income illustration on the December 31, 2021 balance?

There is literally no other option.

[RatherBeGolfing]

15 hours ago, austin3515 said:

When you are doing the 6/30/2022 statement, are we clear that it can reflect your 12/31/2021 balance?  It would seem to me the 6/30/2022 statement should reflect your 6/30/2022 balance.  What about a new participant who rolled $300,000 in on April 1, 2022?  They're not going to get their 6/30/2022 statement.

 

The balance required to be reflected on the statement is the same balance that was required prior to SECURE.  The only change is that the 6/30/2022 has to include the illustration as well.

[RatherBeGolfing]

On 3/17/2022 at 9:19 AM, Micheleciz said:

How is anyone handling the illustrations for participants self-directing in brokerage accounts?

What system do you use for annual admin?  FTW had the required illustration available prior to the October 15, 2021 deadline, you just needed to elect to include or exclude it from the benefit statement.  I assumed all the major providers would have it available by now.

[Lou S.]

8 hours ago, austin3515 said:

There is literally no other option.

Well this is simply not true. It may be economically unfeasable to do the other options in a small plan but other options are available.

For example you could get duplicate statements of every monthly/quarterly statement from the brokerage house and reconcile on that basis, the client just may not want to pay for your time to do it and frankly I think you and I would both agree it's kind of nutty in the as you point out 4 participant market.

[austin3515]

It seems to me you're saying the same thing as me with more words...

[Lou S.]

No you're saying it's impossible; I'm saying its impractical.

Maybe that gets to the same place in the end but there is a big difference.

[austin3515]

In the end no one will do it so forgive me for not seeing the difference (and by "it" I mean doing a 6/30 accounting to show a 6/30 life annuity by 9/15).

[JARichardson]

We posed the question to an ERISA attorney and the response was that if you provide the lifetime income ilustrations with the June 30 quarterly disclosures, they must be distributed by the due date of those disclosures, August 15, 2022 AND they must be based on the June 30, 2022 ending account balances. 

Specifically:  The DOL regulation is 2520.105-3(b), which describes the content of the notice. Item 2 requires that the notice include: "The value of the account balance as of the last day of the statement period . . ."  Items 3 and 4 require that the amount in item 2 be expressed as a single life and a joint and survivor annuity. In other words, the illustration is to be made with reference to the account balance on the last day of the statement period, which is the last day of the quarter.

I've heard that the DOL was going to issue some transitional guidiance by the end of March but that didn't happen.  I just don't see how we can get these all done in this time frame even if all the 2021 work was done and we could start working on 2022 now.  

[Belgarath]

So I have a question: what if you have a new plan, effective 1/1/2022? They utilize individual brokerage investment accounts. First annual valuation/reconciliation will not be until the 12/31/2022 valuation, but they are not pooled accounts - they are participant directed. How in the world would you do a lifetime illustration on such a plan, by mid-September?

[Bird]

I didn't pay that much attention to the initial discussion, but is it crazy to say that the plan is not providing quarterly statements? Just because participants get brokerage statements does not mean the plan is providing quarterly statements. The plan is providing annual statements and would include the lifetime illustration on those annual statements.

[austin3515]

"Ask for forgiveness not permission."  Not sure if that's the right analogy but it's what comes to mind...  At some point logic and reason do need to play a role, and this seems to me to be one of those times.