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November 2013 RETIREMENT

DOL May Require Retirement Lifetime Income Estimates on Benefit Statements

Retirement Plans: Year-End Planning

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DOL May Require Retirement Lifetime Income Estimates on Benefit Statements

The Department of Labor (DOL) is considering whether retirement plan sponsors should include estimated lifetime stream of payments on benefit statements. Providing participants with an estimate of the monthly amount their retirement account balance will provide at retirement age is intended to allow participants to assess their retirement readiness and better prepare for their retirement. Earlier this year, the DOL issued an Advanced Notice of Proposed Rulemaking (ANPRM) to solicit comments about this proposal.

Defined contribution plans would be impacted such as 401(k), 403(b), profit sharing, money purchase pension and employee stock ownership plans (ESOP). Participants in these plans are required to receive benefit statements at least annually. If they are allowed to direct their own investments, they are required to receive quarterly benefit statements. Generally, benefit statements disclose the current account balance activity for the benefit statement period including the beginning balance, current contributions, earnings, fees, forfeitures, ending balance and vesting.

The DOL is proposing that benefit statements also include the following:

  • Current account balance – the benefit statements currently provide the current account balance as of the date of the benefit statement.
  • Current account balance estimated income stream at retirement – the current account balance would be converted to an estimated lifetime income stream of payments, assuming that the participant had reached normal retirement age under the plan as of the date of the benefit statement, even if he or she is much younger.
  • Projected account balance – the current account balance would be projected to normal retirement age based on assumed future contribution amounts and investment returns.
  • Projected account balance estimated income stream at retirement – the projected account balance would be converted to an estimated lifetime income stream of payments, assuming that the person retires at normal retirement age.

The lifetime income streams are to be presented as estimated monthly payments based on the expected mortality of the participant. If the participant is married, a second illustration would be required equal to a level payment for the life of the participant based on the joint lives of the participant and spouse, with a 50% survivor’s benefit continuing to the surviving spouse. An assumed spouse’s age may be used. In addition, the benefit statements would need to contain an easy to understand explanation about the assumptions used for the estimated income streams and must indicate that the illustrations are estimates and are not guarantees.

The DOL has proposed a set of safe harbor assumptions that can use in order to make the projected income streams as follows:

  • Contributions continue to normal retirement age at the current annual dollar amount, increased at a rate of 3% per year
  • Investment returns are 7% per year
  • A discount rate of 3% per year for establishing the value of the projected account balance in current dollars

The DOL closed the comment period on the ANPRM in the summer of 2013. A common comment to the DOL expresses concern about fiduciary litigation exposure if accounts do not provide the estimated income stream at retirement. If or until the DOL issues final guidance, employers and TPAs do not need to make any changes to their current benefit statements.

The DOL currently has a lifetime income calculator on its website for individuals to estimate their retirement income stream. See below for links to this information.

DOL Calculator Instructions

DOL Income Stream Calculator


Retirement Plans: Year-End Planning

Here are a few reminders of the retirement plan administrative matters that should be reviewed and managed on or before January 1, 2014:

  • Plan design changes for 2014: If you are considering changing the design of your retirement plan, you should speak with your third-party administrator as soon as possible to discuss the options available to you. For example, if you sponsor a 401(k) or 403(b) plan, do you want to add a Roth feature so employees can make Roth contributions? Do you want to automatically enroll employees to improve your nondiscrimination testing and automatically escalate their deferrals each year? Some notices need to be provided to employees on or before December 1, 2013 based on the type of plan design, so time is of the essence. See below under “Required annual notices.” Also, plan documents need to be amended usually before the first day of the new plan year where the change will be effective.
  • Implement 2014 retirement plan cost of living adjustment (COLA) limits: The IRS has recently published the 2014 retirement plan COLA limits. Please see our COLA limits chart on our website. If you calculate any matching contributions, you may need to adjust the compensation limits. We recommend you speak with your providers about the new limits.
  • Auto escalation in a 401(k) or 403(b) plan: If your plan currently contains a provision where employees are automatically enrolled and their deferral election increases each year, often those automatic increases are required to be made at the beginning of each plan year. You should review your automatic enrollment and escalation provisions in your plan and make sure the escalations will occur in your payroll system.
  • Required annual notices: The following annual notices should be provided to employees and in some instances terminated participants at least 30 to 90 days before the beginning of the next plan year.
    • 401(k) safe harbor notices: If you sponsor a 401(k) safe harbor plan, a notice should be provided to your employees no later than December 1, 2013 informing them that the plan is a safe harbor plan in 2014. If the plan operates on a non-calendar year basis, the safe harbor notice should be provided no later than 30 days prior to the beginning of the next plan year. For most safe harbor plans, terminated participants do not need to receive this notice. For plans that must inform participants whether they are making the safe harbor contribution or not for 2013, you should send the 2013 safe harbor information to terminated employees who are eligible for the 2013 safe harbor contribution.
    • 401(k) or 403(b) automatic enrollment notices: If you automatically enroll employees in the 401(k) or 403(b) plan, you must provide a notice to employees at least 30 days prior to the beginning of the next plan year, December 1, 2013 for a plan operating on a calendar year basis. Terminated participants do not need to receive this notice since automatic enrollment does not apply to them.
    • Qualified default investment alternative (QDIA): For defined contribution plans where employees are allowed to direct their investments, most fiduciaries have selected a default investment for participants who fail to make an investment selection in their account. Selecting a default investment that is appropriate for the plan and the employees, reduces potential fiduciary liability for investing those participants’ money. The notice provides information about the default investments selected by the plan and must provide certain information, as required by the existing regulations. This notice should be provided no later than December 1, 2013 for calendar year plans, or no later than 30 days prior to the beginning of the next plan year for non-calendar year plans. Terminated participants with account balances should receive the notice.
    • Participant 404a-5 investment and fee disclosures: Starting in 2012, 401(k) plans that allow participants to direct their investments were required to provide investment and fee disclosures which are required to be distributed every 12 months. In order to align the timing of the safe harbor, auto-enrollment or QDIA notices with the annual investment and fee disclosures, employers were going to have to distribute the participant investment and fee disclosures twice in 2013. Responding to industry calls to eliminate the need to send required plan notices twice this year, the Department of Labor (DOL) has provided guidance to allow for the annual investment and fee disclosure notices to be posted 18 months after the last notice was distributed. If you already provided the disclosures in the summer of 2013, you do not need to provide them until the fall of 2014 along with any other annual notices such as the safe harbor, auto-enrollment or the QDIA notices. If you did not provide the disclosures this past summer, you can provide these on or before December 1, 2013 of this year along with your other notices, however you should not distribute them later than 18 months after the date you distributed the disclosures in 2012. Terminated participants with account balances should receive these disclosures. See our article about the notices at:
  • Required minimum distributions: Terminated employees with account balances in the plan who are age 70½ or older and more than 5% owners of a business must receive a minimum distribution on or before December 31. For those individuals just turning 70 ½ in this year, they may delay their first minimum distribution until April 1, 2014. You should check with your service providers to ensure they are calculating and distributing these required distributions where applicable.
  • Plans that must be amended every 5 years: If you sponsor an individually designed plan (a plan that is not pre-approved by the IRS), and your Employer Identification Number (EIN) ends in a “3” or an “8,” you will need to fully update your plan document and submit the document to the IRS no later than January 31, 2014. Also, governmental plans who did not take advantage of a one-time opportunity to submit a determination letter application during Cycle E (ended January 31, 2011), are required to update and submit their documents by the end of January, 2014.
  • Defined contribution plans that must be amended every 6 years: Most defined contribution plans are pre-approved by the IRS such as volume submitter and prototype plans. If you currently sponsor a pre-approved plan, the document must be fully updated every 6 years. Starting next year, most plans will need to be updated for the Pension Protection Act of 2006 (PPA) and subsequent legislative and regulatory guidance. Generally, plan sponsors will have two years to fully update their plan documents for PPA, the two year timeframe ends in 2016. Your document providers should be reaching out to you in 2014 to start the process. Defined benefit plans will start this 6 year amendment cycle in a couple of years.

There may be other requirements for your particular retirement plan so we recommend you discuss your plan with your service provider. TRI-AD will ensure that our clients’ plans will comply with all administrative requirements before the end of 2013. Give your Client Service Manager a call if you have any questions with this information.


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Not Legal or Tax Advice: Nothing in this newsletter should be construed as tax or legal advice. TRI-AD may not be considered your legal counsel or tax advisor. If you have questions about how anything discussed in this newsletter pertains to your personal or your organization's situation, we encourage you to discuss the issue with your attorney and/or tax advisor. TRI-AD's communications are not privileged under attorney-client privilege.

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