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[Federal Register Volume 78, Number 89 (Wednesday, May 8, 2013)]
[Proposed Rules]
[Pages 26727-26739]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-10636]

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2520

RIN 1210-AB20

Pension Benefit Statements

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Department of Labor (Department) is developing proposed 
regulations regarding the pension benefit statement requirements under 
section 105 of the Employee Retirement Income Security Act of 1974, as 
amended (ERISA). This advance notice of proposed rulemaking (ANPRM) 
describes certain rules the Department is considering as part of the 
proposed regulations. The rules being considered are limited to the 
pension benefit statements required of defined contribution plans. 
First, the Department is considering a rule that would require a 
participant's accrued benefits to be expressed on his pension benefit 
statement as an estimated lifetime stream of payments, in addition to 
being presented as an account balance. Second, the Department also is 
considering a rule that would require a participant's accrued benefits 
to be projected to his retirement date and then converted to and 
expressed as an estimated lifetime stream of payments. This ANPRM 
serves as a request for comments on specific language and concepts in 
advance of proposed regulations. The Department intends to consider all 
reasonable alternatives to direct regulation, including whether there 
is a way short of a regulatory mandate that will ensure that 
participants and beneficiaries get constructive and helpful lifetime 
income illustrations.

DATES: Comments are due on or before July 8, 2013.

ADDRESSES: You may submit comments, identified by RIN 1210-AB20, by one 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: e-ORI@dol.gov. Include RIN 1210-AB20 in the subject 
line of the message.
     Mail: Office of Regulations and Interpretations, Employee 
Benefits Security Administration, Room N-5655, U.S. Department of 
Labor, 200 Constitution Avenue NW., Washington, DC 20210, Attention: 
Pension Benefit Statements Project.
    Instructions: All submissions received must include the agency name 
and Regulation Identifier Number (RIN) for this rulemaking. Comments 
received will be posted without change to http://www.regulations.gov 
and http://www.dol.gov/ebsa, and made available for public inspection 
at the Public Disclosure Room, N-1513, Employee Benefits Security 
Administration, 200 Constitution Avenue NW., Washington, DC 20210, 
including any personal information provided. Persons submitting 
comments electronically are encouraged not to submit paper copies.

FOR FURTHER INFORMATION CONTACT: Suzanne Adelman or Tom Hindmarch at 
(202) 693-8500. This is not a toll free number.

SUPPLEMENTARY INFORMATION: This ANPRM has two main sections followed by 
Appendix A. The first section, entitled ``Background,'' contains the 
relevant statutory language on which the Department is basing the ANPRM 
and a discussion of the Department's general policy concern underlying 
the ANPRM. The second section, entitled ``Overview of Intended 
Regulations,''

[[Page 26728]]

presents questions, ideas, and potential language on certain rules the 
Department is considering as part of proposed regulations under section 
105 of ERISA. Each of these sections has multiple subsections. Appendix 
A contains an example that demonstrates how to calculate a lifetime 
income illustration, using the regulatory framework in this ANPRM, for 
a hypothetical male participant, age forty-five, who has a spouse. In 
conjunction with the publication of this ANPRM, the Department also has 
made available on its Web site an interactive calculator that 
calculates lifetime income streams in accordance with such regulatory 
framework. This calculator is at www.dol.gov/ebsa/regs/lifetimeincomecalculator.html.

I. Background

A. Section 105 of ERISA

    Section 105(a) of ERISA, as amended by section 508 of the Pension 
Protection Act of 2006 (Pub. L. 109-280), requires administrators of 
defined contribution plans to provide periodic pension benefit 
statements to participants and certain beneficiaries. 29 U.S.C. 
1025(a). Benefit statements must be provided at least annually. If the 
plan permits participants and beneficiaries to direct their own 
investments, however, benefit statements must be provided at least 
quarterly. Section 105(a)(2) of ERISA contains the content requirements 
for benefit statements. Section 105(a)(2)(A)(i)(I) requires a benefit 
statement to indicate the participant's or beneficiary's ``total 
benefits accrued.'' The proposed rules being considered by the 
Department are pursuant to this section of ERISA, as well as ERISA 
section 505. Section 505, in relevant part, provides that the Secretary 
may prescribe such regulations as the Secretary finds necessary or 
appropriate to carry out the provisions of title I of ERISA. 29 U.S.C. 
1135. Collectively, these provisions provide the authority on which the 
Department is considering a rule that would require a participant's 
``total benefits accrued'' to be expressed as an estimated lifetime 
income stream of payments, in addition to being presented as an account 
balance.

B. General Policy Concern Being Addressed by This ANPRM

    Workers today face greater responsibility for managing their assets 
for retirement, both while employed and during their retirement years. 
This greater responsibility is primarily a result of the trend away 
from defined benefit plans, where a worker's retirement benefit is 
typically a specified monthly payment for life, and toward defined 
contribution plans, where typically contribution, asset allocation, and 
drawdown decisions are assigned to the participant.\1\ Managing 
finances in order to provide income for life for oneself and one's 
spouse is a tremendously difficult but important task. The rule under 
consideration by the Department would provide participants with 
information that the Department believes will ease the burden of this 
task.
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    \1\ The number of private defined benefit plans has fallen from 
just over 103,000 in 1975 to fewer than 48,000 in 2009 (a drop of 
over 50 percent in the last 34 years). The number of private defined 
contribution plans has grown from just over 207,000 in 1975 to 
almost 660,000 in 2009 (an increase of over 200 percent for the same 
time period). See Employee Benefits Security Administration, U.S. 
Department of Labor, Private Pension Plan Bulletin Historical Tables 
and Graphs (Mar. 2012), Table E1: Number of Pension Plans by type of 
Plan, 1975-2009, at http://www.dol.gov/ebsa/pdf/historicaltables.pdf.
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    Research suggests that people want to continue their current 
lifestyle after they retire and are concerned about having adequate 
precautionary savings for emergencies or illness.\2\ Individuals may 
not understand, however, what savings, asset allocation, and drawdown 
decisions are necessary to achieve both of these goals. In particular, 
participants may have difficulty envisioning the lifetime monthly 
income that can be generated from an account balance.
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    \2\ Some individuals may also want to leave bequests to their 
children and other heirs; however, the bequest motive may be less 
salient in retirement savings and spending decisions than other 
priorities. See Jonathan Skinner and Stephen P. Zeldes, The 
Importance of Bequests and Life-Cycle Saving in Capital 
Accumulation: A New Answer, American Economic Review 92(2): 274- 279 
(May 2002) and Jeffrey R. Brown, Jeffrey R. Kling, Sendhil 
Mullainathan and Marian V. Wrobel, Why Don't People Insure Late Life 
Consumption? A Framing Explanation of the Under-Annuitization 
Puzzle, American Economic Review 98(2): 304-309 (May 2008).
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    In a comment letter to the Department, a national non-profit trade 
association of investment managers, consultants, recordkeepers, 
insurance companies, plan sponsors and others stated that 
``[t]ranslating the amount saved into a future income estimate will 
serve to remind participants that their DC plan accumulations are 
needed to generate income throughout retirement. Additionally, when 
they see that $100,000 may only generate $700 of monthly income for 
life, the participant may be incented to save more aggressively.'' \3\ 
The Department believes that expressing a participant's current and 
projected account balances as lifetime income streams would allow 
participants to make more informed retirement planning decisions. 
Recent research supports the hypothesis that providing participants 
with customized information on the decumulation phase can influence 
contribution behavior.\4\
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    \3\ See comment no. 656 in response to the Department's Request 
for Information Regarding Lifetime Income Options for Participants 
and Beneficiaries in Retirement Plans. Comments are available on the 
Department's Web site at www.dol.gov/ebsa/regs/cmt-1210-AB33.html.
    \4\ See Goda, Gopi Shah, Colleen Flaherty Manchester, and Aaron 
Sojourner, ``What Will My Account Really Be Worth? An Experiment on 
Exponential Growth Bias and Retirement Saving,'' NBER Working Paper 
17927, March 2012. See also ACLI Retirement Choices Study, Greenwald 
& Associates, April 2010 (Study revealed that 60 percent of 
respondents say that if the illustration of the participants' 
lifetime income generated by their retirement plan account would not 
be enough to meet their retirement needs, they would ``start saving 
more immediately.'')
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    In view of the importance of this issue, the Department and the 
Department of the Treasury, on February 2, 2010, published a request 
for information, entitled ``Request for Information Regarding Lifetime 
Income Options for Participants and Beneficiaries in Retirement Plans'' 
(RFI). See 75 FR 5253. As stated in the summary to the RFI, the 
Departments are reviewing the rules under ERISA and the plan 
qualification rules under the Internal Revenue Code of 1986 (Code) to 
determine whether, and, if so, how, the Departments could or should 
enhance, by regulation or otherwise, the retirement security of 
participants in employer-sponsored retirement plans and in individual 
retirement arrangements (IRAs) by facilitating access to, and use of, 
lifetime income or other arrangements designed to provide a lifetime 
stream of income after retirement. The RFI contained 39 questions on a 
wide array of subjects. The Department received in excess of 700 
comments in response to the RFI. The Departments subsequently held a 
joint hearing on lifetime income options for retirement plans on 
September 14 and 15, 2010, in order to further consider several 
specific issues. Comments received in response to the RFI, written 
hearing testimony submitted to the Department, and the Department's 
official hearing transcripts are available on the Department's Web site 
at www.dol.gov/ebsa/regs/cmt-1210-AB33.html.
    The RFI contained a section entitled ``Disclosing the Income Stream 
That Can Be Provided From an Account Balance.'' Within this section, 
the RFI contained the following questions relevant to this ANPRM:

    21. Should an individual benefit statement present the 
participant's accrued benefits as a lifetime income stream of 
payments in addition to presenting the benefits as an account 
balance?

[[Page 26729]]

    22. If the answer to question 21 is yes, how should a lifetime 
stream of income payments be expressed on the benefit statement? For 
example, should payments be expressed as if they are to begin 
immediately or at specified retirement ages? Should benefit amounts 
be projected to a future retirement age based on the assumption of 
continued contributions? Should lifetime income payments be 
expressed in the form of monthly or annual payments? Should lifetime 
income payments of a married participant be expressed as a single-
life annuity payable to the participant or a joint and survivor-type 
annuity, or both?
    23. If the answer to question 21 is yes, what actuarial or other 
assumptions (e.g., mortality, interest, etc.) would be needed in 
order to state accrued benefits as a lifetime stream of payments? If 
benefit payments are to commence at some date in the future, what 
interest rates (e.g., deferred insurance annuity rates) and other 
assumptions should be applied? Should an expense load be reflected? 
Are there any authoritative tools or sources (online or otherwise) 
that plans should or could use for conversion purposes, or would the 
plan need to hire an actuary? Should caveats be required so that 
participants understand that lifetime income payments are merely 
estimates for illustrative purposes? Should the assumptions 
underlying the presentation of accrued benefits as a lifetime income 
stream of payments be disclosed to participants? Should the 
assumptions used to convert accounts into a lifetime stream of 
income payments be dictated by regulation, or should the Department 
issue assumptions that plan sponsors could rely upon as safe 
harbors?

    After reviewing the responses to these questions, the Department 
agrees with those commenters who see a need to change the perception of 
retirement savings from simply a savings account to a vehicle for 
income replacement during retirement. Showing a participant the monthly 
retirement income he or she will receive from his or her retirement 
plan may help change that perception and, perhaps as suggested by many 
commenters, motivate workers to increase their savings.\5\ We also 
understand from the commenters that, due to the broadening recognition 
of the importance of improving participants' retirement preparedness, a 
growing number of plans already provide a lifetime income illustration 
and often provide access to other lifetime income planning tools or 
retirement calculators.
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    \5\ Research also suggests that a small change in information 
presented on the benefit statement can have a significant impact on 
savings behavior. See Gopi Shah Goda, Colleen Flaherty Manchester, 
and Aaron Sojourner, What Will My Account Really Be Worth? An 
Experiment on Exponential Growth Bias and Retirement Saving, NBER 
Working Paper No. 17927 (March 2012) at http://www.nber.org/papers/w17927.
---------------------------------------------------------------------------

    Therefore, as part of the proposed regulations under section 105 of 
ERISA, the Department is considering the following ideas:
     A participant or beneficiary's pension benefit statement 
would contain that individual's current account balance. In addition, 
the current account balance would be converted to an estimated lifetime 
income stream of payments. The conversion illustration would assume the 
participant or beneficiary had reached normal retirement age under the 
plan as of the date of the benefit statement, even if he or she is much 
younger.
     For participants who have not yet reached normal 
retirement age, the pension benefit statement would show the projected 
account balance, as well as the lifetime income stream generated by it. 
A participant or beneficiary's current account balance would be 
projected to normal retirement age, based on assumed future 
contribution amounts and investment returns. The projected account 
balance would be converted to an estimated lifetime income stream of 
payments, assuming that the person retires at normal retirement age.
     Both lifetime income streams (i.e., the one based on the 
current account balance and the one based on the projected account 
balance) would be presented as estimated monthly payments based on the 
expected mortality of the participant or beneficiary.\6\ In addition, 
if the participant or beneficiary has a spouse, the lifetime income 
streams would be presented based on the joint lives of the participant 
or beneficiary and his or her spouse.
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    \6\ The term ``expected mortality'' here refers to the 
probabilities in a mortality table, as opposed to life expectancy 
which is a single number that can be calculated from those 
probabilities.
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     Pension benefit statements would contain an understandable 
explanation of the assumptions behind the lifetime income stream 
illustrations. In addition, pension benefit statements would contain a 
statement that projections and lifetime income stream illustrations are 
estimates and not guarantees.
    The Department anticipates that if pension benefit statements were 
to have these key features, participants and beneficiaries might be in 
a better position to assess their retirement readiness and to prepare 
for their retirement.\7\ An illustration based on a person's current 
account balance will provide an immediate baseline to judge their 
present retirement readiness, i.e., ``If I were old enough to retire 
today, this would be my monthly payment for life.'' An illustration 
based on a projected account balance will show, not what the 
participant has saved to date, but what he or she might realistically 
expect to have at retirement, i.e., ``In twenty years, this could be my 
monthly payment for life at my current savings rate.''
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    \7\ Lena Larsson, Annika Sund[eacute]n, & Ole Settergren, 
Pension Information: The Annual Statement at a Glance, OECD Journal: 
General Papers, February 19, 2008 available at: http://www.oecd.org/dataoecd/38/42/44509412.pdf.
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II. Overview of Intended Regulations

    This Overview section of the ANPRM presents questions, ideas, and 
potential language on certain rules the Department is considering as 
part of proposed regulations under section 105 of ERISA. The goal is to 
provide an early opportunity for interested stakeholders to provide 
advice and input into the policy development of future proposed 
regulations. This Overview section contains multiple subsections 
pertaining to the major issues raised in response to the RFI. This 
Overview section is followed by a regulatory framework and Appendix A. 
Appendix A provides an example of how to use the assumptions in the 
ANPRM's regulatory framework to calculate a projected account balance 
and convert the current and projected account balances into lifetime 
income streams.

A. Current and Projected Account Balances

    Among those responding to the RFI, there are competing views as to 
whether a lifetime income illustration should be based on a 
participant's or beneficiary's current account balance or a projected 
account balance. While many commenters believe it is better to provide 
an illustration based on a current account balance, approximately the 
same number of commenters believes it is better to provide an 
illustration based on a projected account balance. A few commenters 
support both approaches.
    Commenters who support using a participant's current account 
balance generally believe it is better and more helpful to base an 
illustration on what the participant actually has than on what the 
participant may have at some point in the future. They make the 
following observations. First, participants and beneficiaries will more 
readily understand illustrations based on actuality than on 
illustrations based on projections. Second, and related, a person is 
more likely to take some planning action if he understands the 
illustration. Third, because projections necessarily will be based on a 
number of assumptions (e.g., future contributions and future investment 
returns), such projections are mere guesses and therefore likely to be

[[Page 26730]]

flawed. Fourth, because lifetime income illustrations are educational 
in nature, a static number at a point in time should be sufficient to 
meet that educational purpose. Fifth, illustrations based on current 
account balances may motivate participants and beneficiaries to save 
more if the monthly payments are small.
    By contrast, those who support the use of projected account 
balances believe that an illustration based on a projection is actually 
more relevant and meaningful to a participant than an illustration 
based on that participant's current account balance, notwithstanding 
the inherent uncertainty in projecting an account balance. They make 
the following observations. First, at present it is common practice 
among financial planners to use projections when providing their 
clients with financial planning advice. Accordingly, if the 
Department's goal is to have pension benefit statements serve as a 
useful planning tool, then illustrations on benefit statements 
similarly should be based on projections. Second, projections may be 
based on assumptions, but not all assumptions are inherently flawed. 
Several commenters believe that the Department can establish reasonable 
parameters for assumptions, in order to avoid deception or abuse and 
increase the accuracy of projections. Third, there is no evidence that 
participants and beneficiaries necessarily will fail to comprehend a 
lifetime income illustration, or a projection, merely because it is 
based on assumptions, particularly where there are sufficient 
disclosures of the assumptions underlying the projections. Fourth, 
showing participants and beneficiaries the power of compound earnings 
may be a significant motivator to increase savings rates. Fifth, an 
illustration based on current account size simply has no relevance to a 
participant with decades to retirement age; and, in fact, such 
incomplete information may very well have the unintended consequence of 
discouraging savings and participation. Sixth, illustrations based on 
current balances may be considered flawed because account balances 
constantly change and, indeed, may change dramatically depending on 
market fluctuations.
    The Department acknowledges the potential merit in both approaches. 
An illustration based on a participant's or beneficiary's current 
account balance could serve as an immediate benchmark for that 
participant because it would show the size of the monthly payment to 
expect if there were no further savings, gains or losses between now 
and retirement. It, in effect, shows participants and beneficiaries 
what they actually have, now, in the form of monthly payments. Although 
this type of benchmark is simplistic, the commenters may be right that 
it could motivate participants and beneficiaries to increase their 
savings rates now, especially if the participant or beneficiary 
perceives the monthly payment to be small relative to his or her 
current income needs. An illustration based on a participant or 
beneficiary's projected account balance, on the other hand, ordinarily 
will reflect larger monthly payments. The Department also agrees with 
those commenters who believe this methodology of framing benefits 
(i.e., showing larger monthly payments than those based on a current 
account balance) may sufficiently motivate participants and 
beneficiaries to stay the course or even to increase their savings 
rates in order to increase their monthly amounts. Although the addition 
of necessary assumptions under this approach may create some additional 
uncertainty, this uncertainty can be mitigated somewhat by requiring 
that only reasonable assumptions be used in the calculations and 
appropriate cautions be included in the disclosure to participants and 
beneficiaries.
    Accordingly, the Department is considering a proposal that 
generally would require pension benefit statements for all defined 
contribution plans to include the following information: (1) The value 
of the account balance as of the last day of the period covered by the 
statement (i.e., ``current balance''), (2) a projected account balance, 
and (3) two lifetime income illustrations. The first lifetime 
illustration would be based on the participant's or beneficiary's 
current account balance, i.e., the ``fair market value of the account 
balance as of the last day of the period covered by the statement.'' 
See ANPRM Sec.  2520.105-1(c)(2)(v). The second lifetime income 
illustration would be based on a participant's or beneficiary's 
projected account balance, i.e., ``the current dollar value of the 
projected balance at normal retirement age.'' See ANPRM Sec.  
2520.105(c)(2)(vi). To avoid confusion and unnecessary complication, 
the second illustration would not be required on any pension benefit 
statement on behalf of a participant who has reached normal retirement 
age under the plan as of the date of the benefit statement.
    The presentation of this data on a participant's or beneficiary's 
benefit statement might look something like this:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
                        Current Balance     Projected Balance
                $125,000                             $557,534
         Monthly Payment                      Monthly Payment
                    $625                               $2,788
------------------------------------------------------------------------

This shows both total balances (current and projected) and the monthly 
payments generated by each. The projected balance ($557,534) and 
related monthly payment ($2,788) would be discounted by an inflation 
factor in order to be shown in today's dollars. The reasoning behind 
this is that by removing inflation from the equation it will be easier 
for participants and beneficiaries to budget for their retirement 
years, today. For example, they can compare their projected monthly 
payments expressed in today's dollars with their current budget needs 
(i.e., current consumption needs) and see how close they are to 
covering those needs. If there is an undesirable gap, they might 
increase their contributions. The Department invites comments on 
whether the projected balance and related monthly payment should be 
discounted for inflation. Many commenters on the RFI believe that 
projections should be presented in today's dollars in order to put 
future buying power into a meaningful context.
    Many of the sample benefit statements reviewed by the Department 
show only the projected monthly payment expressed in today's dollars 
(the $2,788 figure in the example above), and not the discounted 
projected account balance (the $557,534 figure in the example above). 
The Department welcomes comments on whether it makes more sense to show 
both the discounted projected account balance ($557,534) and the 
resulting monthly payments ($2,788), or whether it is enough to show 
only the resulting monthly payments ($2,788).
    All projections and lifetime income illustrations under 
consideration would be based on the participant's ``normal retirement 
age under the plan.'' See ANPRM Sec.  2520.105-1(c)(2)(vi), (d)(1), 
(d)(2)(i) and (e)(4). Section 3(24) defines this as ``the earlier of--
(A) the time a plan participant attains normal retirement age under the 
plan, or (B) the later of--(i) the time a plan participant attains age 
65, or (ii) the 5th anniversary of the time a plan participant 
commenced participation in the plan.'' The Department is considering 
this date because it already is a significant date for ERISA purposes. 
However, this date could be a number of years before the participant or 
beneficiary is actually ready or able to retire from the workforce. A 
number of commenters suggested using the social security retirement 
age. Accordingly, the

[[Page 26731]]

Department specifically welcomes comments on whether the projection and 
lifetime income illustrations should use a date other than the normal 
retirement age, as defined in section 3(24) of ERISA, and if so what 
date and why. For example, comments could address the appropriateness 
of using age 65, social security retirement age (e.g., currently age 66 
or 67 depending upon the participant's birthdate), the minimum required 
distribution date (e.g., age 71) or some other age.
    The mechanics involved in projecting an account balance are 
discussed below in Section II.B of this document, entitled 
``Methodology for Projecting an Account Balance.'' The mechanics 
involved in converting account balances into lifetime income streams 
are discussed in Section II.C of this document, entitled ``Methodology 
for Converting an Account Balance into a Lifetime Income Stream.''

B. Methodology for Projecting an Account Balance

    As explained above, the Department is considering a proposed rule 
that would require a participant's or beneficiary's current account 
balance to be projected to his or her normal retirement age under the 
plan. This section of the ANPRM describes the standards, rules and 
assumptions being contemplated that plan administrators would have to 
follow when projecting participant and beneficiary account balances to 
retirement. In developing these standards, rules and assumptions, the 
Department believes it is important that: (1) Projections be meaningful 
to participants and beneficiaries, (2) projections not be overly 
burdensome for plan administrators to perform, and (3) any regulatory 
framework does not disturb current projection and illustration best 
practices or stifle innovation in this area.
    Based on the RFI comments and the public hearing record, the 
Department understands the act of calculating a participant's projected 
account balance ordinarily would require consideration of the following 
five variables: (1) The participant's current account balance; (2) the 
number of years until the participant retires; (3) future contributions 
to the account (both employer and employee); (4) a rate of investment 
return; and (5) an inflation adjustment to convert the projected amount 
to today's dollars. The Department specifically requests comments on 
whether these are the appropriate variables that should be factored 
into the projections being considered by the Department. If not, why 
not, and are there other essential variables?
    As explained in more detail below, the Department is considering a 
``reasonableness'' standard as a general rule combined with a 
regulatory ``safe harbor.'' The general rule would permit a broad array 
of projection ``best practices'' to continue (which practices we assume 
meet the ``reasonableness'' standard), while the safe harbor would 
offer certainty for those plan administrators who seek that result or 
who do not currently provide projections. Plan administrators who 
follow the deterministic conditions of the safe harbor would have the 
comfort of knowing they have satisfied the primary elements of the 
general rule (i.e., those elements of the general rule that otherwise 
would require discretionary activity of the plan administrator). In 
this regard, the safe harbor would be an option and not a regulatory 
requirement.
    The general rule being considered by the Department is that 
``projections shall be based on reasonable assumptions taking into 
account generally accepted investment theories.'' See ANPRM Sec.  
2520.105-1(d)(1). A projection will not be considered reasonable, 
however, ``unless it is expressed in current dollars and takes into 
account future contributions and investment returns.'' Id. Thus, the 
general rule being considered by the Department does not require any 
single method or single set of assumptions for projecting an account 
balance to normal retirement age, although it does require overall 
reasonableness in light of generally accepted investment theories. Nor 
does the general rule limit the specific factors that must be 
considered, although it does require consideration of at least future 
contributions, investment returns, and inflation.\8\
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    \8\ The general rule is intended to provide plan administrators 
with flexibility to preserve current best practices regarding 
benefit statements and not stifle the development and innovation of 
technological tools in this area. For example, the general rule 
would permit plans that have online tools that employ stochastic 
modeling, such as retirement calculators and similar planning 
devices, to use the same technology to project account balances on 
pension benefit statements, provided that the projection methodology 
meets the reasonableness requirement in the general rule. A 
stochastic model is a tool for estimating probability distributions 
of potential outcomes by allowing for random variation in one or 
more inputs over time usually based on observed historical data for 
the selected inputs. Probability distributions of potential outcomes 
are derived from a large number of simulations (stochastic 
projections) which reflect the random variation in the input(s). The 
Department specifically welcomes comments on whether the general 
rule sufficiently facilitates the use of stochastic modeling for 
pension benefit statements. The Department also welcomes comments on 
other modeling or projection methods that might be appropriate for 
benefit statements and whether the general rule facilitates their 
use.
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    By contrast, the safe harbor being considered by the Department is 
narrower and more prescriptive than the general rule under 
consideration. The contemplated safe harbor would prescribe a specific 
set of assumptions for contributions, returns, and inflation.\9\ The 
set of assumptions, when used together, would be considered per se 
reasonable for purposes of the general rule. Thus, by using the safe 
harbor assumptions together, plan administrators will be deemed to be 
in compliance with the portion of the general rule that requires them 
to take into account contributions, returns, and inflation when 
projecting account balances.
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    \9\ Two of the five variables (current balance and years to 
retirement) are information known to the plan at the time the 
benefit statement is generated and, therefore, the safe harbor would 
not include assumptions pertaining to those variables.
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    The first assumption is that ``contributions continue to normal 
retirement age at the current annual dollar amount, increased at a rate 
of three percent (3%) per year.'' \10\ See ANPRM Sec.  2520.105-
1(d)(2)(i). A yearly contribution increase is included in this safe 
harbor assumption because many workers' contribution elections are 
expressed as a percentage of wages, and wages tend to increase over a 
worker's career due to raises, promotions, cost-of-living adjustments, 
and other factors. The Department is considering a whole number 
percentage (3%) in order to avoid giving participants and beneficiaries 
the false impression that account balance projections are exact.
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    \10\ The assumed dollar amount (not the contribution percentage) 
would increase by a rate of 3% per year. For example, if 
contributions for year one were $10,000, the projected contributions 
would be $10,300 (1.03 x $10,000) for year two, $10,609 (1.03 x 
10,300) for year three, and so forth.
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    The Department considers a 3% per year increase in wages to be a 
conservative assumption, and intentionally chooses a conservative 
assumption in this instance due to the wide variation of wage movement 
across workers. Some workers, particularly young workers, can expect 
their wages to rise at a rate higher than 3% per year. However, older 
workers often see wages increase no faster than the rate of consumer 
price inflation.\11\ The Department believes that more harm would be 
done by overestimating wage

[[Page 26732]]

increases for workers whose wages will remain flat than would be done 
by underestimating wage increases for workers whose wages are likely to 
rise quickly. The Department welcomes comments on this topic.\12\
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    \11\ There is a large body of literature on age-earnings 
profiles which shows that workers' wages tend to increase rapidly 
when young, but at a rate similar to inflation at older ages. See, 
for example, Murphy, Kevin M. and Finis Welch, ``Empirical Age-
Earnings Profiles,'' Journal of Labor Economics, Vol. 8, No. 2 (Apr. 
1990), pp. 202-229.
    \12\ See below for a discussion of historical and projected 
consumer price inflation.
---------------------------------------------------------------------------

    The second and third assumptions are investment returns of seven 
percent (7%) per year (nominal) and a discount rate of three percent 
(3%) per year for establishing the value of the projected account 
balance in today's dollars. See ANPRM Sec.  2520.105-1(d)(2)(ii) and 
(d)(2)(iii). As with the wage increase assumption, the Department is 
considering whole number percentages (7% and 3%) in order to avoid 
giving participants and beneficiaries the false impression that account 
balance projections are exact.
    The 3% discount rate is included in the safe harbor to account for 
consumer price inflation (specifically inflation in the prices of goods 
that retirees consume). The Department is considering 3% because it 
reflects both historical inflation and expectations for future 
inflation. Since 1913, inflation has averaged 3.2% according to 
Consumer Price Index data from the Bureau of Labor Statistics. 
Furthermore, the trustees of the Social Security Trust Fund assume that 
cost of living adjustments (which are determined by the CPI-W) will 
average 2.8% between 2019 and 2086. Comments are specifically requested 
on these assumptions, taking into account the purpose for which these 
assumptions are being used.
Why a 7 percent rate of investment return assumption?
    The 7% safe harbor assumption under consideration is based on 
historical market returns, actual returns derived by participants in 
401(k) plans, and future return forecasts. The 7% rate is a nominal 
rate of return, which corresponds to an approximate 4% real return 
assuming 3% inflation in the future.\13\ Again a round number is being 
considered in order to avoid giving participants and beneficiaries the 
false impression that projected future account balances are exact. The 
following analysis led the Department to this rate.
---------------------------------------------------------------------------

    \13\ To be exact, it would correspond with 3.88% real returns.
---------------------------------------------------------------------------

    From 1996 to 2009, the share of 401(k) assets in equities varied 
from 56% to 76%.\14\ In 2009, this total was approximately 60%. If 
beginning in 1926, 60% of assets were invested in an equity portfolio 
that mirrored the S&P 500 and 40% were invested in a bond portfolio and 
the assets were rebalanced at the beginning of each year without cost 
to preserve the 60/40 allocation, an investor would have averaged a 
5.6% real return through 2010.\15\
---------------------------------------------------------------------------

    \14\ These estimates are based on Employee Benefit Research 
Institute/Investment Company Institute 401(k) plans surveys.
    \15\ Returns are based on Ibbotson data. The calculations were 
performed with the bond share of the portfolio being held either all 
in long-term corporate bonds (40 percent of total funds) or half in 
intermediate government bonds (20 percent of total funds) and half 
in long-term corporate bonds (20 percent of the total funds). The 
relative share made little difference. However, including riskier 
equities in the portfolio does matter. If 30% of assets were in 
small cap funds, 30% in an equity portfolio mirroring the S&P 500, 
and 40% in bonds, the returns would be approximately 1% larger.
---------------------------------------------------------------------------

    However, it is unlikely that average investors would replicate this 
rate of return and more likely would achieve a lower real rate of 
return due, in part, to fees and transaction costs. For example, an 
asset weighted account analysis performed by the Investment Company 
Institute (ICI) indicates that 401(k) plan expense ratios average 
approximately 65 basis points.\16\ Therefore, expense ratios alone 
would reduce the average real return to approximately 5%.\17\ Average 
real returns also are reduced by transaction costs, including costs 
derived from turnover by the fund managers. According to ICI, the 
average dollar weighted turnover rate of 401(k) mutual fund holders is 
43 percent. These transaction costs are not included in expense 
ratios.\18\
---------------------------------------------------------------------------

    \16\ Sarah Holden, Michael Halladay, and Shaun Lutz, The 
Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 
2010, ICI Research Perspective, Vol. 17, No. 4 (June 2011).
    \17\ Returns are calculated as a geometric return 
g=[(1+r1)(1+r2) . . . 
(1+rn)](1/n) where rn=returns in 
the nth year.
    \18\ Holden, supra at footnote 16.
---------------------------------------------------------------------------

    Turnover that occurs due to participants' management of their 
accounts also reduces average real returns. Some of these transactions 
represent poor timing of the markets, leading to further 
underperformance relative to buy-and-hold strategies. Academic 
literature suggests that participants often mistime their investments 
by pulling their money out of equities before periods of strong growth 
and investing more heavily in equities just before a market downturn, 
with load funds experiencing even worse mistiming.\19\
---------------------------------------------------------------------------

    \19\ Geoffrey C. Friesen and Travis Sapp, Mutual Fund Flows and 
Investor Returns: An Empirical Examination of Fund Investor Timing 
Ability, 31 Journal of Banking and Finance, 2796 (2007) available at 
SSRN: http://ssrn.com/abstract=957728. According to the article, the 
underperformance of investors due to poor timing is over 1.5% 
compared to what buy-and-hold strategies would have generated. The 
performance gap with buy and hold strategies due to poor investor 
timing is twice as large for load funds compared to non-load funds.
---------------------------------------------------------------------------

    The measured disparity between the average annual returns that 
costless buy-and-hold strategies would generate and actual participant 
returns is consistent with recent Department statistics. Where a dollar 
invested in a 60/40 balanced fund with no transaction costs would have 
generated an 8.4% nominal return between 1990-2009, Department of Labor 
Form 5500 data indicate that large defined contribution plans achieved 
a nominal return of only 7.1% during the same period.\20\
---------------------------------------------------------------------------

    \20\ The 8.4% returns are based upon Ibbotson data. The 
hypothetical fund would have 60 percent stocks, 20 percent long term 
corporate bonds and 20 percent intermediate government bonds. The 
portfolio would be rebalanced each year at no cost. See U.S. 
Department of Labor, Employee Benefits Security Administration, 
Private Pension Plan Bulletin Historical Tables and Graphs: 1975-
2009, Table E21 (March 2012) at http://www.dol.gov/ebsa/publications/form5500dataresearch.html#statisticalsummaries.
---------------------------------------------------------------------------

    Moreover, past return information, such as U.S. equity returns 
between 1926 and 2010, does not provide a sufficient basis for 
estimating future reasonable expected returns.\21\ This was illustrated 
when the Department solicited peer review comments from economists in 
2006 on the application of its Pension Simulation Model to assess the 
impact of its Qualified Default Investment Alternatives rule (QDIA) on 
pension savings. The commenters maintained that expected future U.S. 
equity returns are lower today than historic returns and will remain 
lower in the future. Based on these comments, the Department revised 
its initial real equity return assumption used to project future 
pension savings to approximately 4.9%.\22\ Industry groups have reached 
similar conclusions. For example, as a follow up to a 1997 survey, a 
2007 survey asked 400 finance professors to forecast what equity 
returns would be over the next 30 years; and the estimates were, on 
average, more than one percent below the 1997 results.\23\
---------------------------------------------------------------------------

    \21\ Ibbotson data begins in 1926.
    \22\ See http://www.dol.gov/ebsa/regs/peerreview.html#section1. 
These peer review comments were submitted to help inform the 
Department's Pension Simulation model that is used to forecast 
savings outlook for participants. Under the model, a portfolio 
consisting of 60% equity and 40% long-term government bonds would 
generate an approximate 7% nominal return.
    \23\ See Ivo Welch, Views of Financial Economists on the Equity 
Premium and on Professional Controversies 73 Journal of Business 501 
(2000). See also Ivo Welch, The Consensus Estimate for the Equity 
Premium by Academic Financial Economists in December 2008, Social 
Sciences Research Network Paper No. 1084918, January 18, 2008 (last 
revised July 22, 2009) at http://ssrn.com/abstract=1084918.
---------------------------------------------------------------------------

    For the reasons discussed above, which take into account historical 
market returns, actual returns derived

[[Page 26733]]

by 401(k) plan participants, and future return forecasts, the 
Department believes that a 7% nominal return assumption (approximately 
4% real return and 3% future inflation) is a reasonable rate of return 
assumption for plan administrators to use when calculating a future 
account balance at normal retirement age. However, the Department 
specifically is requesting comments on the appropriateness of this 7% 
investment return assumption.\24\ Are there other valid approaches or 
data sources EBSA should consider in constructing a prospective safe 
harbor? Commenters are encouraged to keep in mind the Department's 
stated objectives (above) behind a projection requirement. Commenters 
not in favor of this safe harbor assumption are encouraged to provide 
empirical data supportive of alternative approaches.
---------------------------------------------------------------------------

    \24\ In this regard, one idea the Department intends to explore 
further is the behavioral effects of this assumption and whether the 
assumption should be more conservative. As explained in the text 
above, the 7% expected future investment returns is an average. As 
such, it is neutral, meaning that individual participants may 
realize higher or lower returns. In 2010, over 22% of 401(k) 
participants had fewer than 40% of their 401(k) assets invested in 
equity, while 40% had over 80% of assets in equity. See Jack Van 
Derhei, Sarah Holden, Luis Alonso, and Steven Bass, 401(k) Plan 
Asset Allocation, Account Balances, and Loan Activity in 2010, EBRI 
Issue Brief No. 366 (December 2011), Figure 30 at p. 29. Thus, a 
safe harbor assumption that is aimed at the average 401(k) 
participant would be out of line with the asset allocation of a 
majority of 401(k) participants. Participants with conservative 
asset allocations who, in fact, consistently generate returns lower 
than the 7% neutral rate assumption will see their projected balance 
decreasing year after year (even though contributions remain 
stable). What impact will a declining projected balance have on 
these participants? At least some literature suggests people dislike 
declining sequences. See George F. Loewenstein and Drazen Prelec, 
Preferences for Sequences of Outcomes, 100 Psychological Review 91 
(1993). Would a more conservative safe harbor assumption (e.g., 
risk-free return rate, which typically averages about 5% nominal (2% 
real) returns) have a more positive long-term effect than a neutral 
assumption on how participants and beneficiaries would view the 
lifetime income stream illustration and ultimately use it to aid 
their retirement planning?
---------------------------------------------------------------------------

Projections and Rules of the Financial Industry Regulatory Authority
    National Association of Securities Dealers (NASD) Rule 
2210(d)(1)(D), in relevant part, provides that ``[c]ommunications with 
the public may not predict or project performance, imply that past 
performance will recur or make any exaggerated or unwarranted claim, 
opinion or forecast''.\25\ In response to questions regarding the 
relationship, if any, between the projection requirement under 
consideration by the Department and NASD Rule 2210(d)(1)(D) of the 
Financial Industry Regulatory Authority (FINRA), the Department and 
FINRA staff intend to work together and, if necessary, provide 
guidance, which may be similar to the guidance provided in connection 
with the Department's recently finalized participant-level fee 
disclosure regulation under 29 CFR 2550.404a-5.\26\ The Department, 
therefore, is requesting comments on whether, and to what extent, such 
guidance is needed and why.
---------------------------------------------------------------------------

    \25\ In March 2012, the SEC approved new FINRA rules governing 
communications with the public that will replace NASD Rule 2210. 
Under the new rules, which took effect in February 2013, a modified 
version of this provision will be found in FINRA Rule 2210(d)(1)(F). 
See FINRA Regulatory Notice 12-29 (June 2012) (announcing SEC 
approval of new FINRA communications rules).
    \26\ See FINRA Regulatory Notice 12-02 (January 2012) (providing 
guidance on application of communications rules to disclosures 
required by 29 CFR 2550.404a-5). See also SEC Staff No Action Letter 
(October 26, 2011) (agreeing to treat information provided by a plan 
administrator to participants required by and complying with 
disclosure requirements of section 404 of ERISA as if it were a 
communication that satisfies requirements of Rule 482 under the 
Securities Act of 1933).
---------------------------------------------------------------------------

C. Methodology for Converting an Account Balance Into a Lifetime Income 
Stream

    As explained above, in addition to a participant's or beneficiary's 
current and projected account balance, the Department is considering a 
requirement that each balance be expressed as a lifetime stream of 
income. Thus, each benefit statement ordinarily would contain two 
monthly estimated payment illustrations, one based on the current 
balance and a second based on a projected account balance.\27\
---------------------------------------------------------------------------

    \27\ A projected account balance would not be required if the 
participant has reached normal retirement age under the plan. See 
ANPRM Sec.  2520.105-1(c)(2)(vi).
---------------------------------------------------------------------------

    The commenters on the RFI identified two methods to convert an 
account balance to a stream of income in retirement. The first method 
was described as a ``draw down'' or ``systematic withdrawal'' approach. 
This method assumes the participant will withdraw each year a fixed 
dollar amount or a fixed percentage (e.g., 4%) of the account until the 
account is gone. The commenters suggested that three, four or five 
percent per year might be reliable withdrawal rates for a participant 
who starts drawing down his account at age 65. The income stream 
illustrated under this approach would be the fixed dollar amount or 
fixed percentage, and could be shown as either monthly or annual 
payments. The second method is the annuitization approach. This 
approach, for example, expresses the benefit as a lifetime monthly 
payment to the participant similar in form to a pension payment made 
from a traditional defined benefit plan. This approach also is the 
method that insurance companies use to determine payment amounts with 
their annuity products.
    The proposal the Department is considering would use the second 
method of conversion because, of the two approaches, the second method 
reflects ``lifetime'' income whereas the first method reflects an 
income stream that may or may not be payable for the life of the 
participant (e.g., in the case of a participant who retires at age 65 
and dies at age 94, a 4% draw down, assuming a constant zero rate of 
return, would exhaust the account in 25 years instead of life). The 
second method reflects one of the Department's primary goals in 
encouraging meaningful benefit statements--that plan participants and 
beneficiaries are informed of their financial readiness for the 
entirety of their retired lives, not just a portion of it.
    According to the RFI commenters and others, there are five relevant 
factors that must be considered when illustrating or converting an 
account balance (whether current or projected) to a lifetime income 
stream. The first is the date the payments would start, often referred 
to as the ``annuity start date'' (ASD). The second is the age of the 
participant or beneficiary at the ASD. The third is the form of payment 
(e.g., single life annuity). The fourth is the expected mortality of 
the participant or beneficiary and any spouse. The fifth is the 
interest rate for the applicable mortality period. The Department 
specifically requests comments on whether these are the appropriate 
variables for illustrating an account balance as a lifetime income 
stream. If not, why not, and are there other essential variables?
    Each of the foregoing factors is addressed in ANPRM Sec.  2520.105-
1(e). For example, with respect to the form of payment, lifetime income 
illustrations would be based on level payments for the life of the 
participant or beneficiary. See ANPRM Sec.  2520.105-1(e)(1)(i). If the 
participant or beneficiary is married, however, a second illustration 
would be required. This second illustration would be a level payment 
for the life of the participant based on the joint lives of the 
participant/beneficiary and spouse, with a fifty percent survivor's 
benefit to the surviving spouse. See ANPRM Sec.  2520.105-1(e)(1)(ii). 
For this purpose, the plan may assume the spouse is the same age as the 
participant. Id.
    The lifetime income illustrations being contemplated would assume 
that payments begin immediately and that

[[Page 26734]]

the participant or beneficiary generally is normal retirement age under 
the plan (e.g., 65 years old) even if the participant or beneficiary is 
much younger. For example, for a participant age 25 in a plan with a 
normal retirement age of 65, the assumed commencement date in a 
quarterly benefit statement that covered the period October 1, 2015 
through December 31, 2015 would be January 1, 2016. See ANPRM Sec.  
2520.105-1(e)(4). In addition, the 25-year-old participant is assumed 
to be age 65 (i.e., normal retirement age) on January 1, 2016. However, 
if the participant is older than normal retirement age, the plan 
administrator is required to use the participant's actual age.\28\
---------------------------------------------------------------------------

    \28\ If the participant has reached normal retirement age under 
the plan, the only illustration that would be required for this 
participant is the illustration based on his or her current account 
balance. An illustration based on a projected account balance would 
not be required in these circumstances. See ANPRM Sec.  2520.105-
1(c)(2)(vi).
---------------------------------------------------------------------------

    With respect to mortality and interest rate assumptions, many RFI 
commenters and others suggested that when a plan offers an annuity form 
of distribution, the actual mortality and interest rate provisions 
contained in the plan's annuity contract should be reflected in the 
lifetime income illustrations.\29\ The Department agrees and intends to 
include this concept as part of the proposed regulation. See ANPRM 
Sec.  2520.105-1(e)(3). However, for plans that do not offer annuity 
forms of distribution, the Department is considering a safe harbor 
approach for mortality and interest rate assumptions (similar to the 
safe harbor for the projection requirement set forth in ANPRM Sec.  
2520.105-1(d)). Specifically, the proposal would start with a general 
requirement that illustrations must be based on ``reasonable'' 
mortality and interest rate assumptions ``taking into account generally 
accepted actuarial principles.'' See ANPRM Sec.  2520.105-1(e)(2)(i). 
This standard is intended to be flexible and to preserve current best 
practices, on the one hand, but protective on the other hand in that it 
would prohibit the use of assumptions that do not comport with 
generally accepted actuarial principles. Many commenters on the RFI 
requested some degree of flexibility in this area in order to match 
illustrations on benefit statements with illustrations provided through 
online tools. At the same time, however, other RFI commenters expressed 
concern with potential ERISA liability in connection with picking 
mortality and interest rate assumptions for lifetime income 
illustrations and strongly encouraged the Department to adopt safe 
harbor assumptions. Accordingly, the Department is considering the 
following safe harbor assumptions, each of which, when used together, 
would be deemed reasonable under the general requirements in ANPRM 
Sec.  2520.105-1(e)(2)(i).
---------------------------------------------------------------------------

    \29\ In 2010, 18 percent of private industry workers 
participated in a defined contribution retirement plan providing an 
option to take an annuity form of distribution at retirement. See 
Table 21a of U.S. Department of Labor, Bureau of Labor Statistics, 
``National Compensation Survey: Health and Retirement Plan 
Provisions in Private Industry in the United States, 2010,'' 
Bulletin 2770, August 2011. Available at: http://www.bls.gov/ncs/ebs/detailedprovisions/2010/ownership/private/table21a.pdf
---------------------------------------------------------------------------

    The safe harbor rate of interest under consideration is a ``rate of 
interest equal to the 10-year constant maturity Treasury securities 
rate, for the first business day of the last month of the period to 
which the statement relates.'' See paragraph (e)(2)(ii)(A). One 
commenter with members representing more than 90% of the assets and 
premiums in the U.S. life insurance and annuity industry stated that 
its members believe that the 10-year constant maturity Treasury rate 
best represents the interest rates that are reflected in actual annuity 
pricing. In addition, the 10-year constant maturity Treasury rate is 
published daily to the public and widely recognized.\30\ The Department 
agrees that it may be helpful to participants to use a market rate that 
approximates what it actually would cost them to buy a lifetime income 
stream on the open market. In this regard, an illustration based on a 
current market rate would be especially beneficial for those 
participants or beneficiaries who are close to retirement, and less so 
for those farther from normal retirement age.\31\
---------------------------------------------------------------------------

    \30\ See www.federalreserve.gov/releases/h15/data.htm.
    \31\ The Department recognizes that there is no single interest 
rate assumption that would be perfect for all participants. Those 
who will retire tomorrow and plan to purchase lifetime income will 
face pricing that reflects current interest rates. It is clear that 
for these participants, using an interest rate assumption based on 
current rates is appropriate. However, participants who are a 
substantial number of years away from retirement will be faced with 
annuity pricing that reflects future interest rates that are 
unknown. An appropriate way to project these future interest rates 
may be to use a long-term average of historical interest rates, with 
the belief that interest rates tend to revert to the mean. A third 
group of participants, those who will retire in a short number of 
years, are unique still from the other two groups. An example of an 
appropriate projection of interest rates at the time of retirement 
for these participants may be some combination of current and 
historical interest rates. In choosing a safe harbor assumption, the 
Department must consider all of these groups of participants and how 
their projections would be affected. For example, if the Department 
ultimately uses current interest rates as the safe harbor, movement 
in interest rates would be an additional source of variation in 
benefits statement projections year over year for participants who 
are a substantial number of years away from retirement.
---------------------------------------------------------------------------

    The Department, however, is specifically requesting comments on 
whether the 10-year constant maturity Treasury rate assumption is the 
best interest rate assumption to use in this context, or whether there 
is a different interest rate or combination of rates that should be 
used, and why. For example, other RFI commenters mentioned that the 
Department might give some consideration to using the Pension Benefit 
Guaranty Corporation (PBGC) select and ultimate rates used to determine 
liabilities of terminated single-employer plans under section 4044 of 
ERISA which are published monthly by the PBGC \32\ or the ``applicable 
interest rate'' under section 417(e)(3)(C) of the Code, although these 
commenters did not provide reasoning behind their suggestions. The 
commenter in favor of the 10-year constant maturity Treasury rate is 
concerned that the PBGC rates may not be sufficiently current for this 
type of illustration; or that such rates are not appropriate for pay 
out annuities. This commenter, in addition, is concerned that the Code 
section 417(e)(3)(C) rates, which it states are used for converting 
defined benefit amounts to a lump sum for distribution, do not 
approximate current annuity prices.
---------------------------------------------------------------------------

    \32\ See 29 CFR 4044, Appendix B. See also www.pbgc.gov/prac/interest/monthly.html.
---------------------------------------------------------------------------

    The safe harbor mortality assumption under consideration is ``the 
applicable mortality table under section 417(e)(3)(B) of the Code, in 
effect for the month that contains the last day of the period to which 
the statement relates.'' See ANPRM Sec.  2520.105-1(e)(2)(ii)(B).\33\ 
The section 417(e)(3)(B) applicable mortality table is a unisex table 
created and published by the Treasury Department.\34\ The same 
commenter that suggested using the 10-year constant maturity Treasury 
rate also suggested using the section 417(e)(3)(B) applicable mortality 
table. Other commenters suggested the mortality

[[Page 26735]]

table used by the PBGC to determine the liabilities of terminated 
single-employer plans under section 4044 of ERISA.\35\
---------------------------------------------------------------------------

    \33\ The Department welcomes comments on the use of this month 
to determine the mortality, or whether it would be more appropriate 
to use the mortality table in effect for the month containing the 
assumed commencement date as defined in ANPRM Sec.  2520.105-
1(e)(4).
    \34\ Currently, the applicable mortality table is based on the 
Society of Actuaries, RP 2000 Mortality Tables Report at http://www.soa.org/ccm/content/research-publications/experience-studies-tools/the-rp-2000-mortality-tables, with a fixed blend of 50% of the 
static male combined mortality rates and 50% of the static female 
combined mortality rates promulgated under 26 CFR 1.430(h)(3)-1(c). 
See IRS Notice 2008-85, IRB 2008-42 which published unisex mortality 
tables for purposes of Code section 417(e)(3)(B) through 2013.
    \35\ See 29 CFR part 4044, Appendix A.
---------------------------------------------------------------------------

    The Department selected the section 417(e)(3)(B) applicable 
mortality table for the following three reasons. First, the Treasury 
Department periodically updates the mortality table.\36\ Second, unlike 
the PBGC mortality tables, the section 417(e)(3)(B) applicable 
mortality table is unisex.\37\ Third, the table is publicly available 
and widely known to employee benefit plan service providers. The 
Department, however, is specifically requesting comments on whether the 
section 417(e)(3)(B) mortality table is the best mortality assumption 
to use in this context, or whether there is a different mortality 
assumption that should be used, and why. For example, one commenter 
suggested that if the plan did not provide an annuity option, the plan 
should be permitted to use gender based mortality tables in order to 
illustrate the dollar amount of a lifetime income stream which the 
participant or beneficiary could achieve if his or her account was 
rolled over into an individual retirement account and used to purchase 
a commercial annuity contract using gender based mortality.\38\
---------------------------------------------------------------------------

    \36\ The 417(e)(3)(B) mortality table is derived from the 
mortality tables prescribed under the funding rules of Code section 
430(h)(3)(A) which states that the mortality tables prescribed by 
the Treasury Department ``shall be based on the actual experience of 
pension plans and projected trends in such experience . . . taking 
into account results of available independent studies of mortality 
of individuals covered by pension plans.''
    \37\ To the extent an individual account plan offers an annuity 
option, the mortality factors have to be the same for males and 
females to comply with Arizona Governing Committee v. Norris, 436 
U.S. 1073 (1983).
    \38\ Since the female mortality tables show a longer life 
expectancy and the male mortality tables show a shorter life 
expectancy than a unisex table, the dollar amount of a male 
participant's monthly payment would be higher and a female 
participant's monthly payment would be lower in an illustration 
using gender based tables.
---------------------------------------------------------------------------

    The rules and assumptions for converting current and projected 
account balances into lifetime income streams, discussed above and set 
forth in ANPRM Sec.  2520.105-1(e), do not include an ``insurance 
load.'' In this context, the term ``insurance load'' is intended to 
describe the difference between the market price of lifetime income and 
the price of actuarially fair lifetime income. The insurance load may 
include insurance company profits, costs of insuring against systemic 
mortality risk, costs of holding cash reserves, advertising costs, the 
cost of selection (if not accounted for in the mortality table), and 
other operating costs. The Department specifically is requesting 
comments on whether a proposed rule should contain provisions requiring 
that such loads be factored into lifetime income streams and, if so, 
how should or could the rules and assumptions in ANPRM Sec.  2520.105-
1(e), including the safe harbor assumptions in ANPRM Sec.  2520.105-
1(e)(2)(ii), be modified to reflect such a requirement. For example, 
should the Department consider using a load assumption similar to the 
one used by the PBGC to determine the value of benefits for a single 
employer plan that has been involuntarily terminated and placed in 
trusteeship by the PBGC? \39\
---------------------------------------------------------------------------

    \39\ See 29 CFR part 4044, Appendix C.
---------------------------------------------------------------------------

D. Disclosure of Assumptions

    Most of the commenters on the RFI indicated that the assumptions 
underlying any illustration should be disclosed to participants and 
beneficiaries. The Department agrees that clear disclosure of 
assumptions is needed for multiple reasons, but primarily in order to 
make it clear to participants and beneficiaries that projected amounts 
are not guarantees. The proposal under consideration, therefore, would 
require disclosure of any assumptions used in the benefit statement 
with regard to the projected account balance and the illustration of 
the lifetime income streams. See ANPRM Sec.  2520.105-1(c)(6)(i) and 
(ii). In addition, the proposal would require that the pension benefit 
statement include a statement that the lifetime income stream is only 
an illustration and that actual periodic payments that may be purchased 
at retirement will depend on numerous factors and may vary 
substantially from the lifetime income stream illustration in the 
benefit statement. See ANPRM Sec.  2520.105-1(c)(6)(iii). The 
Department is interested in comments on whether it would be helpful to 
participants and beneficiaries if their benefit statements explained 
that a consequence of purchasing an annuity outside of their pension 
plan is that gender-based mortality tables may be used and, if so, men 
will receive higher monthly payments and woman will receive lower 
monthly payments.
    It is essential that assumption disclosures be written in manner 
calculated to be understood by the average plan participant. The 
Department, therefore, is interested in comments and suggestions on how 
best to achieve this result. For example, is there model language 
within the financial community or elsewhere that plan administrators 
could use to plainly explain or describe this information so as to 
increase its readability and understandability? Are there other 
formatting or presentation techniques relevant to this inquiry?

E. In-Plan Annuities

    In addition to traditional distribution annuities, the Department 
is aware of the marketing and presence of in-plan annuity arrangements 
as investment options, sometimes generically referred to as 
``incremental'' or ``accumulating'' annuities. According to the RFI 
commenters, these are arrangements that permit participants to make 
ongoing contributions toward the current purchase of a future stream of 
retirement income payments, which are guaranteed by an insurance 
company. Thus, conceptually, each contribution buys a small annuity. In 
this fashion, a participant has the ability to accumulate multiple 
small annuities over a career which, in the aggregate, could provide 
significant lifetime income.
    More specifically, the RFI commenters explained that under these 
arrangements, typically, the ongoing participant contributions actually 
accumulate ownership units, that each such unit has a current market 
value, and that each unit will pay a fixed amount (usually per month) 
for the life of the owner commencing at retirement. For example, assume 
the current purchase price of a unit is $500 and each unit purchased 
will pay $15 per month, for life, commencing at retirement. A 
participant who has accumulated 100 units over his career will receive 
payments of $1,500 per month, for life, commencing at retirement. The 
RFI commenters further explain that although the current price of a 
unit ($500 in this example) fluctuates depending on a number of 
factors, such as the interest rate environment and the employee's age 
when the unit is purchased, the guaranteed monthly payment of each unit 
purchased (e.g., $15 in this example) is fixed. RFI commenters also 
indicate that some products allow the participant to transfer out of 
the incremental annuity investment option and into another of the 
plan's designated investment alternatives, such as a mutual fund or 
other similar plan investment option, prior to normal retirement age or 
some other date (e.g., the date distributions commence). The price per 
unit or pay out rate of an in-plan annuity with this transferability 
feature may differ from one without this feature.
    The Department is soliciting comments on how best to factor 
investments of this type into lifetime income illustrations. For 
instance, one approach is that the current market

[[Page 26736]]

value of all in-plan annuity units accumulated by a participant could 
be added to the rest of that participant's account balance under ANPRM 
Sec.  2520.105-1(c)(2)(v), before determining the projected account 
balance under ANPRM Sec.  2520.105-1(c)(2)(vi).\40\ A second approach 
is to add the total guaranteed monthly payment amount derived from all 
of a participant's in-plan annuity units to the estimated monthly 
payment amount of the non-annuity portion of the participant's account, 
if any, determined under ANPRM Sec.  2520.105-1(c)(2)(vii) and 
(viii).\41\ A third approach is to convert the participant's entire 
account balance, even any part that is not allocated to an in-plan 
annuity option, to a lifetime income stream using the current unit 
price of the in-plan annuity option.\42\
---------------------------------------------------------------------------

    \40\ For example, assume a participant has $100,000 invested in 
certain of the plan's designated investment alternatives. Also 
assume that in addition to those investments, the participant also 
has 10 in-plan annuity units and that the current market value of a 
unit is $500. Under this approach, the participant's total account 
balance under ANPRM Sec.  2520.105-1(c)(2)(v) would be $105,000, and 
the lifetime income illustrations would be based on this amount.
    \41\ For example, assume a participant has accumulated 100 units 
of an in-plan annuity and that each unit accumulated will pay $15 
per month, for life, commencing at retirement. Thus, this 
participant will receive payments of $1,500 per month, for life, 
commencing at retirement based on these 100 units. Also assume this 
participant has a projected monthly payment of $2,500 based on 
investments in other designated investment alternatives under the 
plan (e.g., mutual funds) using the safe harbor assumptions. Under 
this approach, the guaranteed monthly payment of the in-plan annuity 
($1,500) could be added to the estimated monthly payment of $2,500, 
totaling $4,000 per month, for life.
    \42\ For example, assume a participant had accumulated 100 in-
plan annuity units that each pay $15 per month, for life, commencing 
at retirement (totaling $1,500 per month). Also assume the 
participant had another $100,000 invested in other designated 
investment alternatives under the plan (such as mutual funds) and 
that the purchase price of a unit on the last day of the statement 
period is $500. Under this approach, the lifetime income 
illustration could be as if the participant had accumulated an 
additional 200 units with the $100,000 ($100,000/$500 = 200), 
totaling $3,000 per month in retirement income. Thus, the total 
estimated monthly payment under this approach would be $4,500 
($3,000 + $1,500) per month, for life.
---------------------------------------------------------------------------

    These three approaches are not necessarily the only options for 
incorporating the in-plan annuity values in lifetime income 
illustrations and the Department welcomes suggestions on other 
approaches. In this regard, commenters are encouraged to address 
whether, and to what extent, the language in ANPRM Sec.  2520.105-
1(e)(3) would need to be modified.\43\ In addition, the Department 
welcomes the submission of actual benefit statements or similar 
documents showing how plans or insurance companies currently disclose 
in-plan annuity unit prices and monthly payment guarantees. Finally, 
given the wide array of ERISA plans and investment products, the 
Department also is soliciting comments on whether there are any 
foreseeable product-specific problems for products similar to in-plan 
annuities.
---------------------------------------------------------------------------

    \43\ Paragraph (e)(3) provides that ``[i]f the plan offers an 
annuity form of distribution pursuant to a contract with an issuer 
licensed under applicable state insurance law, the plan shall 
substitute actual plan terms for the [safe harbor mortality and 
interest] assumptions set forth in paragraphs (e)(2)(ii)(A) and (B) 
of this section.''
---------------------------------------------------------------------------

F. Miscellaneous

    Many RFI commenters, hearing witnesses, and others who support 
lifetime income illustrations believe that the Department should take 
steps to encourage, rather than require, such illustrations on pension 
benefit statements. According to these individuals, mandating lifetime 
income illustrations would be expensive and may expose plan fiduciaries 
to litigation from plan participants and beneficiaries for a variety of 
reasons. The most commonly cited reason for potential lawsuits is unmet 
expectations. For example, if participants and beneficiaries during 
their working years mistakenly believe that the lifetime income 
illustrations on their pension benefit statements are promises or 
guarantees of a specific income stream, the participants and 
beneficiaries might sue if their actual account balances at retirement 
do not generate an income stream equal to or greater than the stream 
depicted in the illustrations in prior pension benefit statements.
    The Department believes both concerns may be overstated. As to 
costs, first, some plans already provide lifetime income illustrations 
on pension benefit statements.\44\ Thus, for these plans, there may be 
little if any additional cost associated with the ANPRM's regulatory 
framework. Second, pursuant to section 105 of ERISA, pension benefit 
statements already are required to include certain participant account 
information. Thus, for plans not already providing lifetime income 
illustrations on pension benefit statements, the Department does not 
believe that adding the lifetime income illustrations described above 
to these statements should significantly increase the cost of pension 
benefit statements.
---------------------------------------------------------------------------

    \44\ In one survey of large U.S. plan sponsors, 33% of 
respondents indicated that they provide retirement income 
projections to participants on benefit statements. See MetLife, 
``Retirement Income Practices Study,'' June 2012 Located at: https://www.metlife.com/retirementincomestudy.
---------------------------------------------------------------------------

    The Department, however, specifically requests comments on the 
costs (and benefits) of including the illustration described herein in 
pension benefit statements. In this regard, the Department welcomes 
ideas on how the cost of the contemplated lifetime income illustrations 
might be reduced without compromising the anticipated benefits. For 
example, would there be substantial cost savings if illustrations were 
required only annually rather than quarterly? If yes, please explain 
why and quantify if possible. In addition, would there be substantial 
cost savings if the Department published (and periodically updated) a 
table of conversion factors based on the safe harbor assumptions 
contemplated in paragraph (e) of the ANPRM's regulatory framework? Such 
a table would make it possible to produce projections that satisfy the 
safe harbor with simple calculations and without the need to reference 
Treasury rates, mortality tables and other actuarial assumptions.\45\ 
If yes, please explain why and quantify if possible. In addition, would 
there be substantial cost savings if all benefit statements were 
required to contain joint and survivor illustrations of the type 
described in ANPRM Sec.  2520.105-1(e)(1)(ii), as opposed to including 
such illustrations only in benefit statements of married participants 
and beneficiaries? In other words, would there be cost savings in not 
having to track and determine marital status solely for pension benefit 
statement requirements? If yes, please explain why and quantify if 
possible.
---------------------------------------------------------------------------

    \45\ For example, such a table would be based on the interest, 
mortality, and other assumptions selected by the Department and 
would contain factors for calculating a single life annuity and a 
joint and 50 percent survivor annuity. The relevant factor 
multiplied by the number of $1,000 increments comprising the 
participant's or beneficiary's total account balance would equal the 
monthly lifetime income stream. Assume, for example, that the 
participant has an account balance of $100,000 and the factor for 
single life annuity commencing at age 65 is 5.00 per thousand 
dollars. The $100,000 account balance would equate to a lifetime 
income stream of $500 per month ([$100,000 / 1,000] x 5.00).
---------------------------------------------------------------------------

    As to the concern about potential lawsuits based on unrealized 
expectations, the Department believes this issue might be addressed in 
two ways. First, benefit statements could include a clear and 
definitive statement that the lifetime income illustration is an 
estimate, based on specific assumptions, and not a guarantee. The 
Department believes this disclosure would serve to put participants and 
beneficiaries on notice that the illustration is only an estimate and, 
thereby, minimize the likelihood that

[[Page 26737]]

they would believe the illustration is a promise or guarantee. The 
Department specifically requests comments on the extent to which the 
language in ANPRM Sec.  2520.105-1(c)(6) would accomplish this result. 
Second, the Department is considering establishing a regulatory safe 
harbor under section 105 of ERISA for plan administrators to rely on 
when developing lifetime income illustrations for pension benefit 
statements. By specifying the precise standards and assumptions a plan 
administrator would use to make a lifetime income illustration on a 
pension benefit statement, a regulatory safe harbor would substantially 
reduce the likelihood of lawsuits against that administrator based on 
an imprudent or improper calculation of lifetime income. See ANPRM 
Sec.  2520.105-1(d)(2) and (e)(2)(ii). The Department specifically 
requests comments on the extent to which the regulatory safe harbor 
being considered would help address concerns about such potential 
lawsuits.
    Furthermore, the Department has not concluded that the ANPRM's 
regulatory framework is the only or best approach. The Department 
intends to consider all reasonable alternatives to direct regulation, 
including whether there is a way short of a regulatory mandate to get 
plan administrators voluntarily to provide their participants and 
beneficiaries with constructive and helpful lifetime income 
illustrations. In developing the framework, the Department was mindful 
of the fact that administrators of defined contribution plans have been 
free to provide lifetime income illustrations to participants and 
beneficiaries for nearly 40 years since the enactment of ERISA, yet few 
actually have done so despite the apparent support for them evidenced 
by the vast majority of responsive RFI commenters and hearing witnesses 
who supported the concept. This ANPRM, nonetheless, solicits comments 
on all reasonable ideas, either in lieu of or in conjunction with a 
direct regulation, to address this very important issue. Commenters are 
encouraged to be specific with the responses and include data if 
possible to support their positions. The Department also welcomes the 
submission of sample benefit statements or similar documents currently 
being provided to participants and beneficiaries that include lifetime 
income illustrations.

List of Subjects in 29 CFR Part 2520

    Annuity, Defined contribution plans, Disclosure, Employee benefit 
plans, Employee Retirement Income Security Act, Fiduciaries, Lifetime 
income, Pensions, Pension benefit statements, Plan administrators, 
Recordkeepers, Third party administrators.

    For the reasons set forth in the preamble, the Department of Labor 
proposes to amend 29 CFR part 2520 as follows:

PART 2520--RULES AND REGULATIONS FOR REPORTING AND DISCLOSURE

0
1. The authority citation for part 2520 is revised to read as follows:

    Authority: 29 U.S.C. 1021-1025, 1027, 1029-31, 1059, 1134 and 
1135; and Secretary of Labor's Order 1-2011, 77 FR 1088 (Jan. 9, 
2012). Sec. 2520.101-2 also issued under 29 U.S.C. 1132, 1181-1183, 
1181 note, 1185, 1185a-b, 1191, and 1191a-c. Sec. 2520.101-4 also 
issued under 29 U.S.C. 1021(f). Sec. 2520.101-6 also issued under 29 
U.S.C. 1021(k) and Pub. L.109-280, Sec.  502(a)(3), 120 Stat. 780, 
940 (2006). Secs. 2520.102-3, 2520.104b-1 and 2520.104b-3 also 
issued under 29 U.S.C. 1003,1181-1183, 1181 note, 1185, 1185a-b, 
1191, and 1191a-c. Secs. 2520.104b-1 and 2520.107 also issued under 
26 U.S.C. 401 note, 111 Stat. 788. Sec. 2520.105-1 also issued under 
sec. 508(a) of Pub. L. 109-280, 120 Stat. 780.

    2. Add Sec.  2520.105-1 to subpart F to read as follows:

Sec.  2520.105-1  Periodic Pension Benefit Statements--Individual 
Account Plans.

    (a) [Reserved]
    (b) [Reserved]
    (c) Content requirements. A benefit statement furnished under this 
section shall prominently display the beginning and ending dates of the 
period covered by the statement and contain the following information, 
based on the latest information available to the plan:
    (1) [Reserved]
    (2) Total benefits accrued.
    (i)--(iv) [Reserved]
    (v) The fair market value of the account balance as of the last day 
of the period covered by the statement;
    (vi) If the participant has not reached normal retirement age as 
defined under the plan, the current dollar value of the projected 
account balance at normal retirement age determined in accordance with 
paragraph (d) of this section;
    (vii) The amount specified in paragraph (c)(2)(v) of this section 
expressed as a lifetime income stream in accordance with paragraph (e) 
of this section; and
    (viii) The amount specified in paragraph (c)(2)(vi) of this section 
expressed as a lifetime income stream in accordance with paragraph (e) 
of this section.
    (3)-(5) [Reserved]
    (6) Explanation of lifetime income stream illustration.
    (i) Disclosure of the assumptions used pursuant to paragraph (d) of 
this section to establish the present value of the projected account 
balance required by paragraph (c)(2)(vi);
    (ii) Disclosure of the assumptions used pursuant to paragraph (e) 
of this section to establish the lifetime income stream illustration 
required by paragraphs (c)(2)(vii) and (c)(2)(viii) of this section; 
and
    (iii) A statement that the lifetime income stream illustrations 
required under paragraphs (c)(2)(vii) and (c)(2)(viii) of this section 
are illustrations only and that actual monthly payments that may be 
received at normal retirement age will depend on numerous factors and 
may vary from the illustrations in the benefit statement.
    (d) Rules and assumptions for projecting an account balance to 
normal retirement age.
    (1) General. For purposes of paragraph (c)(2)(vi) of this section 
(which sets forth the requirement to project a current account balance 
to normal retirement age under the plan), projections shall be based on 
reasonable assumptions taking into account generally accepted 
investment theories. A projection is not reasonable unless it is 
expressed in current dollars and takes into account future 
contributions and investment returns.
    (2) Safe harbor. The following set of assumptions, when used 
together, are deemed reasonable for purposes of paragraph (d)(1) of 
this section:
    (i) Contributions continue to normal retirement age at the current 
annual dollar amount, increased at a rate of three percent (3%) per 
year;
    (ii) Investment returns are seven percent (7%) per year (nominal); 
and
    (iii) A discount rate of three percent (3%) per year (for 
establishing the value of the projected account balance in current 
dollars).
    (e) Rules and assumptions for converting current and projected 
account balances into lifetime income streams. For purposes of 
paragraphs (c)(2)(vii) and (c)(2)(viii) of this section--
    (1) Measuring lives. A lifetime income stream shall--
    (i) Be expressed as a level monthly payment, payable for the life 
of the participant beginning on the assumed commencement date, as 
defined in paragraph (e)(4) of this section;
    (ii) If the participant is married, also be expressed as a level 
monthly payment, payable for the life of the participant beginning on 
the assumed commencement date, as defined in paragraph (e)(4) of this 
section, with a survivor's benefit, which is equal to fifty

[[Page 26738]]

percent (50%) of the monthly payment payable to the participant, 
payable for the life of the surviving spouse. For this purpose, it is 
permissible to assume the spouse is the same age as the participant; 
and
    (iii) Be based on the assumptions set forth in paragraph (e)(2) of 
this section subject to the requirements in paragraph (e)(3) of this 
section.
    (2) Assumptions.
    (i) General. The interest and mortality assumptions behind a 
lifetime income stream shall each be reasonable taking into account 
generally accepted actuarial principles.
    (ii) Safe harbor. The following assumptions are deemed reasonable 
for purposes of paragraph (e)(2)(i) of this section:
    (A) A rate of interest equal to the 10-year constant maturity 
Treasury securities rate, for the first business day of the last month 
of the period to which the statement relates; and
    (B) Mortality as reflected in the applicable mortality table under 
section 417(e)(3)(B) of the Internal Revenue Code, in effect for the 
month that contains the last day of the period to which the statement 
relates.
    (3) Plan terms. If the plan offers an annuity form of distribution 
pursuant to a contract with an issuer licensed under applicable state 
insurance law, the plan shall substitute actual plan terms for the 
assumptions set forth in paragraphs (e)(2)(ii)(A) and (B) of this 
section.
    (4) Assumed commencement date. For purposes of paragraph (e) of 
this section, the assumed commencement date shall be the first day 
following the period to which the statement relates, and the 
participant shall be assumed to be normal retirement age (as defined in 
section 3(24) of the Act) on this date (unless the participant is older 
than normal retirement age, in which case the participant's actual age 
should be used).
    (f) [Reserved]

    Note:  The following appendix will not appear in the Federal 
Regulations.

Appendix A

Lifetime Income Illustration

    (a) Purpose. This Appendix A contains an example that 
illustrates the application of the safe harbor provisions set forth 
in ANPRM Sec.  2520.105-1(d) and (e). The example is intended to aid 
the reader in understanding how the two safe harbors operate, 
independently and together, when calculating lifetime income streams 
based on current and projected account balances. The example is not 
intended as a model format or to provide model content for pension 
benefit statements, including the explanation for participants and 
beneficiaries required by ANPRM Sec.  2520.105-1(c)(6).
    (b) Example: Facts. Plan A is an individual account plan 
described in section 3(34) of the Act. Since the plan does not 
provide for the allocation of investment responsibilities to 
participants and beneficiaries, the plan is required to provide a 
benefit statement at least once each calendar year. The statement 
period and the plan year are the 2012 calendar year. Normal 
retirement age under the Plan is age 65. Participant P is age 45. 
His birth date is June 30, 1967. He is married. His account balance 
on December 31, 2012, the last day of the statement period, was 
$125,000. His contributions (employee and employer) for 2012 were 
$9,709. His contributions for 2013 are assumed to be $10,000 ($9,709 
x 1.03). Contributions are assumed to be made on January 1 each 
year.
    (c) Safe harbor for projecting an account balance to normal 
retirement age. Based on the safe harbor assumptions in ANPRM Sec.  
2520.105-1(d)(2) (as reflected in Table 1), the present value of the 
current balance ($125,000) projected to normal retirement age, as 
required by ANPRM Sec.  2520.105-1(c)(2)(vi), is $557,534. P's 
December 31, 2012 account balance of $125,000 is projected to be 
$467,621 assuming a 7% return, compounded annually. Future 
contributions increasing at 3%, compounded annually with earnings at 
7%, compounded annually, are projected to be $524,575 on June 30, 
2032. P's aggregate projected account balance on June 30, 2032 is 
$992,196 ($467,621 + $524,575). The projected account balance of 
$992,196 discounted to December 31, 2012 at 3%, compounded annually, 
is $557,534.

                                 Table 1
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Normal Retirement Date.................  June 30, 2032.
Number of years in projection..........  19.5 (January 1, 2013 through
                                          June 30, 2032).
Number of contributions................  19 ($10,000 per year adjusted
                                          by contribution increase rate)
                                          + 1 (final contribution of
                                          $5,000 in 2032, adjusted by
                                          contribution increase rate).
Paragraph (d)(2)(i) safe harbor--        3% compounded annually.
 contribution increase rate.
Paragraph (d)(2)(ii) safe harbor--rate   7% compounded annually.
 of return applied to current account
 balance of $125,000 and post 2012
 projected contributions.
Paragraph (d)(2)(iii) safe harbor-       3% compounded annually.
 discount rate used to determine
 present value of the projected account
 balance.
------------------------------------------------------------------------

     (d) Safe harbor for converting current and projected account 
balances into lifetime income streams. Based on the safe harbor 
assumptions in ANPRM Sec.  2520.105-1(e)(2)(ii) (as reflected in 
Table 2), the lifetime income stream illustrations of the current 
and projected balances required by ANPRM Sec.  2520.105-1(c)(2)(vii) 
and (c)(2)(viii), respectively, are set forth below. Using the 
assumptions in Table 2, the factor for converting a single sum into 
a level monthly payment for the life of P only (Single Life Form) is 
$5.00 per $1,000 of account balance. The factor for converting a 
single sum into a level monthly payment for the life of P with a 50% 
survivor benefit payable to P's spouse following his death (Joint 
and 50% Survivor Form) is $4.51 per $1,000 of account balance.

                                 Table 2
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Paragraph (e)(2)(ii)(A) safe harbor--10  1.63%, compounded annually.
 year constant maturity Treasury rate
 on December 3, 2012:
Paragraph (e)(2)(ii)(B) safe harbor--    Unisex mortality table
 Code section 417(e)(3)(B) applicable     published in IRS Notice 2008-
 mortality table:                         85.
Assumed commencement date..............  January 1, 2013.
Assumed Age of P on the assumed          65.
 commencement date.
Assumed Age of P's spouse on the         65 (i.e., same as P).
 assumed commencement date.
------------------------------------------------------------------------

[[Page 26739]]

Applying the factors described above to the December 31, 2012 
current and projected account balances, the pension benefit 
statement would show the following lifetime income streams:

----------------------------------------------------------------------------------------------------------------
                                                                                 Joint and 50% survivor form
                                                          Single life form -------------------------------------
Account balance on last day of statement period (12/31/   (monthly payment                      Monthly payment
                          12)                            for P's life with   Monthly payment    after P's death
                                                            no survivor      during P's life      to surviving
                                                              benefit)                               spouse
----------------------------------------------------------------------------------------------------------------
Current--$125,000......................................               $625               $564               $282
Projected--$557,534....................................              2,788              2,514              1,257
----------------------------------------------------------------------------------------------------------------

    Signed at Washington, DC, this 17th day of April, 2013.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.

[FR Doc. 2013-10636 Filed 5-7-13; 8:45 am]
BILLING CODE 4510-29-P
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