Retirement Insights

Lifetime Income Disclosure Rules Spur Investment Discussions

Lifetime Income Disclosure Rules Spur Investment Discussions

There is still time for financial advisors to get ahead of the potential hue and cry that may result come mid-2022, when many defined contribution (DC) plan participants will see their first “lifetime income illustrations” as now required under law and Department of Labor interim regulations. Now is the time to have conversations with plan sponsors to plan for constructive participant communications and interactions on how their plan account balances will translate into lifetime retirement income.


Section 203 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 amended the Employee Retirement Income Security Act of 1974 (“ERISA”) and requires 401(k) and other DC plans to include additional disclosures (i.e., lifetime income illustrations) in participant benefit statements on an annual basis. Final interim regulations regarding the lifetime income illustrations took effect September 18, 2021, and a series of Department of Labor Frequently Asked Questions (the “FAQs”) instructed plan sponsors on when they must provide the first disclosures. For participant-directed plans, sponsors must provide the first lifetime income illustrations no later than with the second quarterly benefit statements of 2022. This means, the first illustration needs to be in place for the quarter that ends June 30, 2022. For nonparticipant directed DC plans, sponsors must provide the lifetime income disclosure on the annual pension benefit statement for the 2021 calendar year (e.g., making October 15, 2022, the deadline). To satisfy the lifetime income disclosure requirement, plan sponsors must provide participants at least two illustrations of lifetime income payments each year. Using the participant’s accumulated account balance, the illustrations are to show what monthly income payments would look like as:

1. A single life annuity

and a

2. Qualified joint and 100 percent survivor annuity.

The Need for Retirement Income Illustrations

The primary reason business owners and U.S. workers invest in qualified retirement plans, is to, eventually, create adequate income for participants to carry them through retirement. It can be argued the retirement industry has lost sight of that end objective—or perhaps never had a clear vision of how to deliver lifetime income. A great majority of the machinations of plan sponsors, plan committees, plan advisors, and even some participants is mired in and myopically focused on the investment returns within the plan. Plan returns are indeed important, but what truly is the objective of a retirement plan? The objective is to grow the asset base through contributions and investment performance in a manner that would then allow each participant to turn the accumulated balance into an adequate stream of income upon which to live in retirement.

For over 40 years, the retirement products and services industry has been focused on asset accumulation to the near exclusion of solutions for income generation. The industry is playing catch up on strategies for transitioning DC account balances into streams of retiree income. More and more firms are beginning to work on retirement income solutions, but there is still a long way to go. And, rightfully so, the Department of Labor is pressing the issue with the requirement to produce retirement income illustrations for participants. Needless to say, the industry should get ready for a reaction. The lifetime income disclosure rules are far from perfect, but they do press the important issue of helping participants understand what kind of monthly payment their retirement plan balances could give them and can serve as a call to action for them and their advisors.

What is this lifetime income illustration? It is a snapshot in time based on several assumptions. According to the Department of Labor, the illustration takes a participant’s plan account balance as of the end of the statement period, and assumes the participant:

  • Is 67-years-old (or, his or her actual age, if older);
  • Starts payments as of the last day of the statement period;
  • Is married with a spouse who is the same age as the participant;
  • Payment example #1 reflects a 100 percent qualified joint and survivor annuity, and payment example #2 shows is a single life annuity;
  • Uses an interest rate that would be used to price a commercial annuity (i.e., the 10-year constant maturity Treasury securities yield rate for the first business day of the last month of the statement period); and
  • Uses the IRS’s unisex mortality tables under IRC Sec. 417.

This hypothetical income illustration is not necessarily the best, because if a person is age 30, 40, or even 50, odds are he or she is not retiring right now. Moreover, a 30-year-old’s plan balance is likely quite low and, therefore, the projection would show a mere pittance for monthly retirement income.

As one can imagine, this illustration has the potential to be somewhat shocking to a lot of people. Without properly setting the stage for the communication—what happens next? The phones ring—and probably not for good reasons. First, participants may call their employers and complain about plan options and question how the plan has been governed. Next, plan sponsors may call their plan advisors. Now is the time to take proactive steps to turn the interactions into positive exchanges. Advisors can seize the opportunity with a three-pronged approach.

First, plan advisors need to get in front of plan sponsors to make sure they are aware of the lifetime income illustration requirements and their implications. Keep in mind that six months is not a long time to prepare.

Second, plan advisors should be addressing the income illustrations in their financial wellness offering to participants to help reduce panic. Plan advisors need to educate plan sponsors and have a real discussion about what an adequate employee communication and financial wellness communication will be about before June 30, 2022.

And, finally, plan advisors should talk with plan sponsors, in earnest, about participants accumulating retirement wealth and how that must translate into lifetime income in retirement. Advisors spend a lot of time crafting plan investment menus to help participants accumulate wealth. But the reason they're doing that is to help them distribute their accumulated wealth in a systematic fashion for the balance of their retirement.

According to studies, plan sponsors prefer participants keep their DC plan balances “in plan” after they retire.1 To align with this “through retirement” philosophy, plan sponsors could offer target date funds, managed accounts and other qualified default investment alternatives (QDIAs) with a through retirement glidepath, creating an environment for participants to stay in the plan. It is also in the best interest of record keepers to believe in through retirement glidepaths in order to retain retirement plan assets. Therefore, following that paradigm, it is incumbent upon the plan sponsors and their advisors to create plan environments that easily facilitate participants transitioning from asset accumulation to retirement income.


The DOL is making the winter/spring of 2022 the season to discuss retirement income solutions with plan sponsors and participants by requiring retirement income illustrations. There needs to be an intelligent employee communication/wellness effort structured around this. Plan advisors have time to capitalize on this opportunity to assist plan sponsors with this important plan structure discussion and deepen their relationships. It all begins with a simple invite, “Let’s take a closer look at what we have in the plan’s investment menu that solves for participants’ retirement income needs?”

1T. Rowe Price, What DC Plan Sponsors Prefer Retiring Participants Do and Why It Matters, April 2021; PIMCO's 2021 U.S. Defined Contribution Consulting Study, 2021.

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