On May 13, 2015 Senators Isakson (R-GA) and Murphy (D-CT) introduced the Lifetime Income Disclosure Act, a bill that would require defined contribution plan sponsors to provide participants an annual estimate of the ‘lifetime income stream equivalent’ of their accrued benefit. The bill would require the Department of Labor to issue implementing regulations within a year of enactment, base lifetime income disclosure on the participant’s accrued benefit (no projections of contributions or earnings) and limit sponsor liability.
In this article we briefly discuss the proposal; we then discuss (and compare with the Isakson-Murphy bill) DOL’s project on the same issue.
Lifetime income disclosure
The bill would require that a DC plan administrator provide participants, in at least “one pension benefit statement during any one 12-month period,” a description of the “lifetime income stream equivalent” of the participants’ “total accrued benefits.” “Lifetime income stream equivalent” is defined as “the amount of monthly payments the participant … would receive if the total accrued benefits of such participant … were used to provide (i) a qualified joint and survivor annuity and (ii) a single life annuity.” DOL, in rules issued in connection with this legislation, could allow the inclusion of term certain or other features.
The bill would require DOL, no later than one year after enactment, to issue a “model lifetime income disclosure” explaining:
That actual payments will depend on numerous factors and may vary substantially from provided disclosure.
The assumptions used to determine the disclosure.
The bill would require DOL to prescribe the assumptions to be used in “converting total accrued benefits into lifetime income stream equivalents.” In this regard DOL may specify a single set of assumptions or a range of permissible assumptions. With respect to the calculation of a joint and survivor annuity, the spouse would be assumed to be the same age as the participant. It appears that what is contemplated by the bill is that DOL will, in effect, produce ‘safe harbor’ assumptions and methodologies for this calculation.
The bill provides that if a participant’s accrued benefit can be invested in a ‘lifetime income stream’ under the terms of the plan, the administrator may in certain circumstances base disclosure on assumptions and methodologies used under that option. While it is not entirely clear, this may allow, for instance, an administrator to use the assumptions and methodologies under a life annuity option available under the plan. Whether this treatment would extend to, e.g., a life expectancy option is less clear.
Limitation on sponsor liability
Under the bill, no plan fiduciary, plan sponsor, or other person would have any liability solely by reason of the provision of lifetime income stream equivalents which are derived in accordance with DOL assumptions and model disclosure rules. This provision addresses sponsor concerns about litigation risk in connection with lifetime income disclosures.
Current DOL project
As we discussed in our article DOL mulls ‘lifetime income’ illustrations for DC benefit statements, DOL is itself considering proposing (according to DOL’s most recent regulatory agenda, by July 2015) a rule on DC lifetime income disclosure. Certain aspects of DOL’s 2013 “Advance notice of proposed rulemaking” on this issue were controversial.
Under the ANPR, a sponsor would have had to provide two lifetime income numbers, one based on the participant’s current account balance and one based on her account balance projected to normal retirement age, assuming continued contributions, increased for earnings. Some objected to the use of projections as misleading. The Isakson-Murphy bill does not provide for this sort of projection – the lifetime income estimate is simply based on the participant’s ‘total accrued benefit’ (presumably, as of the date of the estimate).
Under the ANPR, for purposes of converting a participant’s account balance to a lifetime income stream, DOL adopted an ‘annuity,’ rather than a ‘draw-down,’ approach. Some suggested that a ‘draw-down’ approach was preferable. Further, in making the annuity conversion, the administrator could generally use any mortality and interest rate assumptions it chose so long as each assumption is “reasonable taking into account generally accepted actuarial principles.” Some suggested that a single set of assumptions for all plans might be more useful.
The Isakson-Murphy bill appears to adopt DOL’s ‘annuity’ approach; it requires that DOL prescribe the assumptions and methodologies to be used; and it provides that assumptions and methodologies under an annuity option offered under the plan may be used. Other assumption and methodology issues are left to DOL.
Finally, the Isakson-Murphy bill implements an approach on which DOL asked for comments in the ANPR: a set of safe harbor assumptions and methodologies plus limitation on liability language.
We will continue to follow this issue.