ochre or yellow tan stylized picture of the nation's capitol building dome with stars (Photo: Shutterstock)

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

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Related - SECURE Act: What are therequired minimum distributions & new withdrawaloptions?

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Part of the Further Consolidated Appropriations Act, 2020 thatPresident Trump signed into law, it amounts to the most significantretirement legislation in more than a decade.  It makesnumerous changes (including a variety of enhancements) affectingqualified retirement plans, 403(b) and 457(b) plans, individualretirement accounts, and other employee benefits.

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The Act provides for a remedial plan amendment period that doesnot end until the last day of the 2022 plan year (the 2024 planyear for governmental plans).  Employers must modifycertain aspects of plan administration (and potentially financialplanning decisions) now to align with the SECURE Act's moreimmediate changes.

What to know about the SECURE Act's lifetime incomeoptions

One of the centerpieces of theSECURE Act is its attempt to encourage plan sponsors to offerlifetime income investment and distribution options in definedcontribution plans. 

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Consistent with Department of Labor rulemaking over the past fewyears, Congress hopes to give plan participants a more realisticpicture of their retirement readiness and an ability to chooseannuity forms of payment that they will not outlive.

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1. Safe harbor: The Act amends ERISAto create a new fiduciary safe harbor on which defined contributionplan fiduciaries may rely when selecting lifetime incomeproviders.

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The safe harbor is similar to the one described in DOLregulations that were issued in 2008, but the new rule sets forthspecific measures that fiduciaries may take when selecting alifetime income provider — typically an insurance company.

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By obtaining certain representations from the provider about itsstatus under, and satisfaction of, state insurance laws, planfiduciaries are deemed to have satisfied the prudence requirementunder ERISA applicable to the selection.

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

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

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2. Estimate of monthly income: TheSECURE Act also requires plan sponsors to include in definedcontribution plan benefit statements an estimate of the monthlyincome a participant's account balance could produce in retirementif a qualified joint and survivor annuity or a single life annuitywere purchased with the account. Sponsors must provide theseestimates at least annually, regardless of whether a lifetimeincome option is offered under the plan.

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The Act directs the Department of Labor to issue safe harbormodel disclosures and specific assumptions that plans may use whenpreparing the estimates by the end of 2020.

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The new disclosures will be required after model notices areissued. Plan sponsors should ask their recordkeepers how theyintend to provide the required disclosures.

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

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3. Portable lifetime income options: Manylifetime income products are subject to fees and penalties (such assurrender and early-termination charges) if liquidated. These feescan dissuade plan fiduciaries from offering such options under aplan, but the SECURE Act addresses these concerns by makinglifetime income options portable.

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

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This is an option for defined contribution plans, including401(k), 403(b), and governmental 457(b) plans, and goes into effectfor plan years beginning on and after January 1, 2020. Plans thatintend to offer a lifetime income option should include languagepermitting these kinds of distributions. Similarly, plan sponsorsshould consider whether to amend their plans to accept in-kindtransfers of lifetime income investments.

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

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