Sponsors Need Clarity on Emergency Savings Accounts, Say Industry Advocates

Retirement industry groups filed comment letters Wednesday with the Department of Labor asking for clarity on certain provisions of the SECURE 2.0 Act of 2022 and for streamlined disclosure requirements. The comments came in response to a DOL request for information in August.

SECURE 2.0 contains several provisions reforming the disclosure process for retirement plans. Among them are changes to lump sum distribution disclosures and to the electronic delivery of statements.

Emergency Savings

The Insured Retirement Institute and the ERISA Industry Committee both asked the DOL to issue regulations to clarify how the emergency savings “sidecar” accounts created by SECURE 2.0 fit into the overall retirement plan. The ESAs are limited to $2,500 (indexed), and participants can withdraw funds without the typical 10% penalty.

The IRI asked the DOL for guidance on how to interpret the word “emergency” for purposes of withdrawals and how ESAs overlap with plans using a qualified default investment alternative. Specifically, can sponsors designate the ESA as a QDIA? Can a plan have separate QDIAs for the ESA and for the retirement plan?

The ERIC asked the DOL to clarify that the $2,500 cap does not apply to growth within the account. Since highly compensated employees do not qualify for an ESA, the ERIC requested that the DOL be flexible with employees who change HCE status over the course of the year. It also asked for regulatory flexibility on matches and vesting schedules as applied to ESAs.

Electronic Delivery

Section 338 of the law requires defined contribution plans to send at least one paper copy of a benefit statement to each participant annually, every three years for defined benefit plans. Participants may, however, elect to receive these documents electronically, and sponsors can also use the 2002 safe harbor exemption. The provision is effective for plan years after December 31, 2025.

Jason Berkowitz, the chief legal and regulatory affairs officer at the IRI, explains that the 2002 safe harbor permits sponsors to send benefit statements and other disclosures electronically only if they ensure that the participants receiving the disclosures have reliable internet access and are, in fact, receiving the disclosures.

The comment letter sent by the IRI described Section 338 as “unfortunate” because of the additional burdens this will place on sponsors. The DOL had previously issued an updated safe harbor ruling in 2020, Berkowitz says, which was more of a “notice and access” approach by which sponsors could default participants into electronic delivery if they were given the ability to opt out and were notified when disclosures were available.

Sponsors using the 2020 safe harbor, but not the 2002 safe harbor, will be subject to the annual paper requirements, Berkowitz says. Since Section 338 is a statutory requirement that the DOL cannot regulate away, the IRI letter advocated that the DOL “go no further than is clearly and absolutely necessary” to comply with SECURE 2.0. The IRI letter noted that electronic delivery is generally more secure than paper delivery and is more easily translated into other languages or to an audio file for vision-impaired participants.

Lump Sums

The ERIC letter also addressed disclosures of lump-sum buyout offers. Section 342 of SECURE 2.0 requires defined benefit plans to disclose several items to participants eligible for a lump sum payment. At 90 days before a lump-sum offer decision period, plan sponsors must disclose the assumptions used to calculate the lump sum, the value of annuities offered by the plan, tax rules involved with accepting a lump sum and a warning that annuities purchased in the market might be more expensive than those in the plan and that taking a lump sum exposes the recipient to longevity risk.

According to the ERIC letter, the DOL should not mandate any new factors to be disclosed, but should allow plans to list potential “positives” of taking a lump sum instead of “negatives.” For example, sponsors should be allowed to inform participants that lump sums can help estate planning and can pay off in the long run if the payment is invested well.

Section 342 does not contain any “negatives” for lump sums, per se, but would require disclosure on alternatives to the payment. Andrew Banducci, the senior vice president for retirement and compensation policy at the ERIC, clarifies that the warnings in the disclosure “have a skeptical trend” and said that a Model Notice circulated by the DOL “does not provide a balanced perspective” on lump sum payments.

SECURE 2.0 requires the DOL and Department of the Treasury to issue joint regulations on the lump-sum provision no earlier than one year after the December 29, 2022, enactment of the law.

The comment period for the RFI closed on Wednesday, and it is not clear when the DOL will propose the regulations required. Sidecar ESAs are eligible to be created starting in 2024, but they are unlikely to be offered until regulatory guidance is issued.