United States: Update On Retirement Income Projections

In our last newsletter, we wrote about the DOL's Advance Notice of Proposed Rule Making (ANPRM) concerning the projection of retirement income on ERISA participant benefit statements. Since that article was published, a number of plan sponsor and service provider organizations have filed their comments with the DOL, and the comment period has now expired. This article contains a general summary of the comments and our view of the next steps.

The DOL will now begin its review of the comments filed by the private sector. Many of the comments were thoughtful and detailed... which will give meaningful input to the regulatory process. Different comments filed by a number of knowledgeable and credible organizations supported almost all of the alternative approaches suggested by the DOL, meaning that the comments often conflicted with each other. Also, many of the organizations noted significant disagreement on key issues even within their own membership. As a result, the DOL should find some level of support (and some level of dissent) for virtually any avenue that it decides to pursue. Examples of the alternatives discussed include whether the projections should be made mandatory or merely voluntary with a fiduciary safe harbor to encourage their use, and even whether the project should be abandoned entirely in favor of online calculators for plan participants.

Realistically though, we suspect that the DOL will, after reviewing the comments, draft a proposed regulation that mandates retirement income projections on participant benefit statements. While some employer organizations and service provider organizations argued against the mandate, organizations that represent employees, participants and retirees were nearly unanimous in arguing that mandated projections would provide value to plan participants.

Allowing for a reasonable period of time to review the comments and draft a proposed regulation, it is possible that a regulatory package could be sent to the Office of Management and Budget (OMB) in mid-first quarter 2014. It ordinarily takes the OMB three months for its review, which suggests that the proposed regulation would not be publicly available for comment until well into the second quarter. That would then be followed by a comment period and perhaps public hearings. Allowing time for that, together with the development of the final regulation and its review by the OMB, would add another seven to nine months to the process.

So, our "best guess" is that we could have a final regulation in the second quarter of 2015, but with a deferred effective date to allow time for system changes and other necessary implementation steps.

Once again, the DOL received comments from knowledgeable and credible organizations that would support almost any outcome. That said, based on our reading of the comments, we think that the following are "high possibility" outcomes:

  • The projection of retirement income on benefit statements will be mandated.
  • There will be a safe harbor... of sorts. Many of the commenters responded unfavorably to the safe harbors in the ANPRM, which consisted largely of fixed assumptions. These commenters suggested that fixed percentages are too rigid and would inhibit innovation and efforts to improve the quality of projections by adjusting assumptions over time to reflect "real life" shifts in the interest rate and capital markets. Instead, they recommended that the DOL provide retirement income projection guidelines similar to the investment education guidelines in Interpretive Bulletin 96-1. At a high level, this approach would ensure that plan sponsors could avoid having their projections deemed to be fiduciary "investment advice" (and avoid corresponding potential liability) so long as they are based on reasonable assumptions and do not steer plan participants toward specific investment products. We believe there is a significant possibility that the DOL will adopt this approach in developing the proposed regulation.
  • Most of the commenters suggested that plan sponsors should be able to select from among a variety of methods for projecting the payment of retirement income. For example, some of the commenters favor the withdrawal method, rather than the annuity method. Others prefer the annuity method, but with the calculations based on commonly accepted actuarial assumptions, rather than the specific annuity contracts offered by each particular plan. We believe that there is a significant possibility that the DOL will adopt the latter alternative.

Those are our thoughts. At best, it is a guessing game. So, we encourage readers to view this as our attempt to "handicap" the odds rather than make specific predictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Frederick Reish
Bruce L. Ashton
 
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