Paul L. Caron

Monday, August 30, 2021

Kaplan & Federici: The New Income Projection Rules For Defined Contribution Plans

Richard L. Kaplan (Illinois; Google Scholar) & Barry Federici, The New Income Projection Rules for Defined Contribution Plans, 172 Tax Notes Fed. 897 (Aug. 9, 2021):

Tax Notes Federal (2020)The SECURE Act enacted at the end of 2019 requires that defined contribution retirement plans provide plan participants will projections of how much monthly income their accumulated balances will generate upon their retirement. This article analyzes the new Labor Department regulations that go into effect on September 18, 2021 and suggests various revisions, including an explanation of likely tax consequences.

The enactment in 2019 of the SECURE Act heralded a new era of democratized retirement planning. Although financial advisers in this space, be they human or robotic, have proliferated in recent years, most American workers have not availed themselves of their services. While inertia is surely responsible for this situation, at least in part, the fact remains that many participants in defined contribution retirement plans need some sort of nudge to explore this subject seriously. The SECURE Act’s requirement of lifetime income streams just might provide that nudge, and the Labor Department’s soon-to-be-effective regulations represent a major advance in this area.

The applicable regulations are certainly not perfect, but their readily understandable format is designed to prompt discussions, and most of their mandated assumptions are appropriate. The main exception is the presumed retirement age of 67, which is unrealistic for most workers, but a change to age 62 would not constitute a major shift in the regulations’ general orientation. To be sure, every prospective retiree’s situation will be slightly different in terms of marital status, the age difference between the retirement plan participant and their spouse, what percentage of the participant’s annuity should be continued for that person’s spouse, and so forth. But the most relevant variables are established, and their overall impact is explained well in the benefit plan statement supplement’s model language. Clearly, the familiar adage that “your mileage may vary” applies in this context, but the new regulations do an admirable job of telling defined contribution retirement plan participants what the road ahead looks like and why they may want to adjust their driving accordingly.

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