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This is the second in a series of articles describing key provisions of the SECURE Act — this time, with a focus on lifetime income options. Some of the changes under the SECURE Act are effective immediately, while others are effective in plan or tax years beginning on or after January 1, 2020.  Employers need to understand these changes to prepare themselves for the resulting effect on retirement plan administration and financial planning.

Related - SECURE Act: What are the required minimum distributions & new withdrawal options?

Part of the Further Consolidated Appropriations Act, 2020 that President Trump signed into law, it amounts to the most significant retirement legislation in more than a decade.  It makes numerous changes (including a variety of enhancements) affecting qualified retirement plans, 403(b) and 457(b) plans, individual retirement accounts, and other employee benefits.

The Act provides for a remedial plan amendment period that does not end until the last day of the 2022 plan year (the 2024 plan year for governmental plans).  Employers must modify certain aspects of plan administration (and potentially financial planning decisions) now to align with the SECURE Act's more immediate changes.

What to know about the SECURE Act's lifetime income options

One of the centerpieces of the SECURE Act is its attempt to encourage plan sponsors to offer lifetime income investment and distribution options in defined contribution plans. 

Consistent with Department of Labor rulemaking over the past few years, Congress hopes to give plan participants a more realistic picture of their retirement readiness and an ability to choose annuity forms of payment that they will not outlive.

1. Safe harbor: The Act amends ERISA to create a new fiduciary safe harbor on which defined contribution plan fiduciaries may rely when selecting lifetime income providers.

The safe harbor is similar to the one described in DOL regulations that were issued in 2008, but the new rule sets forth specific measures that fiduciaries may take when selecting a lifetime income provider — typically an insurance company.

By obtaining certain representations from the provider about its status under, and satisfaction of, state insurance laws, plan fiduciaries are deemed to have satisfied the prudence requirement under ERISA applicable to the selection.

Fiduciaries who qualify for the safe harbor would be protected from liability for participant losses in the event the lifetime income provider is unable to pay the full benefits when due.

This is an optional change that is currently in effect and applicable to defined contribution plans that are subject to ERISA, including 401(k) and ERISA 403(b) plans. Those choosing to exercise this option will receive safe harbor protection for fiduciaries who decide to offer a lifetime income option. However, fiduciaries still should engage in a robust process when deciding whether to offer such an option, giving careful consideration to costs.

2. Estimate of monthly income: The SECURE Act also requires plan sponsors to include in defined contribution plan benefit statements an estimate of the monthly income a participant's account balance could produce in retirement if a qualified joint and survivor annuity or a single life annuity were purchased with the account. Sponsors must provide these estimates at least annually, regardless of whether a lifetime income option is offered under the plan.

The Act directs the Department of Labor to issue safe harbor model disclosures and specific assumptions that plans may use when preparing the estimates by the end of 2020.

The new disclosures will be required after model notices are issued. Plan sponsors should ask their recordkeepers how they intend to provide the required disclosures.

Some recordkeepers already provide similar information on their statements or websites; plan sponsors should understand how that information may change under the new rules, particularly how current lifetime income projections might be affected.

3. Portable lifetime income options: Many lifetime income products are subject to fees and penalties (such as surrender and early-termination charges) if liquidated. These fees can dissuade plan fiduciaries from offering such options under a plan, but the SECURE Act addresses these concerns by making lifetime income options portable.

The Act permits participants to make direct trustee-to-trustee transfers of lifetime income investments (or to transfer annuity contracts) to an eligible employer plan or IRA if fiduciaries make a plan-level decision to eliminate the lifetime income option. Participants may take a distribution of the option without regard to other plan-level restrictions on in-service distributions.

This is an option for defined contribution plans, including 401(k), 403(b), and governmental 457(b) plans, and goes into effect for plan years beginning on and after January 1, 2020. Plans that intend to offer a lifetime income option should include language permitting these kinds of distributions. Similarly, plan sponsors should consider whether to amend their plans to accept in-kind transfers of lifetime income investments.

Greg Ash is a partner at Spencer Fane LLP in the firm's Overland Park, Kansas office. He is chair of the firm's Employee Benefits Practice Group and helps his clients maximize the value and minimize the risks inherent in their benefit plans.