The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) includes three sections designed to encourage more employers to adopt retirement plans, and it simplifies a few issues that have bedeviled plan sponsors and taxpayers for years.
Among these issues are:
- Whether participants in defined contribution plans will be able to save enough to sufficiently fund their living expenses in retirement;
- Whether participants will be able to assume the risks associated with successfully managing their retirement income; and
- Whether participants will gain a false sense of financial security when viewing their accumulated assets in a defined contribution plan in isolation.
The SECURE Act includes three major lifetime income-related provisions:
Section 109: Portability of Lifetime Income Options
Section 109 of the SECURE Act allows for special distributions of a lifetime income investment. Once a plan participant has chosen a lifetime income option, the annuity can be transferred in a direct trustee-to-trustee transfer between qualified plans, including IRAs, if the lifetime income option is removed from the original plan’s investment options. The transfer must be made within a 90-day period that ends on the date when the lifetime income investment is no longer an option under the plan.
Section 203: Disclosures Regarding Lifetime Income
The SECURE Act has added new lifetime income disclosure requirements to benefit statement rules under ERISA. The law requires that a participant’s total accrued benefit be expressed as a lifetime income stream in the form of a single life annuity. If the participant has a same-age spouse, the total accrued benefit must be expressed as a qualified joint and survivor annuity. These lifetime income stream disclosures must be provided in one benefit statement during each 12-month plan period.
This new requirement does not apply until the Department of Labor issues interim final rules to include several assumptions, including lifetime income conversion and model lifetime income disclosures. The statutory deadline to issue these interim final rules is December 20, 2020.
Section 204: Fiduciary Safe Harbor for the Selection of Lifetime Income Provider
Previously, plan providers have been reluctant to offer guaranteed lifetime income products due to subjectively worded standards in the 2008 Safe Harbor regarding the selection of annuity providers. The SECURE Act provides a new, optional safe harbor for insurers when selecting a guaranteed life income contract as part of an individual plan.
To obtain safe harbor protection for the selection of a guaranteed life income contract, a plan fiduciary must:
- Conduct objective, analytical research to identify qualified insurers;
- Consider an insurer’s financial capability of fulfilling its obligations under the contract;
- Consider contract costs, including fees and commissions, when assessing contract value, including the contract’s features and benefits and insurer attributes; and
- Make a conclusion based on the above factors that an insurer can fulfill its financial obligations and that the cost of the contract is reasonable.
A plan provider’s fiduciary duties when choosing a guaranteed life income contract provider can be satisfied by:
- Ensuring the insurer is licensed to offer guaranteed life income contracts;
- Ensuring the insurer has not had their license revoked or suspended, has filed audited financial statements according to the laws of the state where it is domiciled, has maintained the necessary financial reserves to satisfy the statutory requirements in every state in which it does business, and is not operating under an order of supervision, rehabilitation or liquidation;
- Confirming that the insurer undergoes a financial examination by the insurance commission of its home state every five years; and
- Requiring that the insurer notifies the fiduciary of any change in circumstances that occur after the above representations have been made which would render those representations untrue at the time a guaranteed life income contract is issued.
Having satisfied these requirements, a fiduciary is relieved of liability for any losses that may result from an insurer’s failure to satisfy its financial obligations under the contract.
If you have questions about how the CARES Act impacts you, or if you are interested in making changes to the benefit plans your company offers, reach out to the experienced ERISA attorneys at Hall Benefits Law. We can help you review available options and make sure they’re offered in a compliant way. Call 678-439-6236 today.
Hall Benefits Law, LLC
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