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Will concerns hamper guaranteed annuity use in retirement plans?

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A new study embraces guaranteed lifetime income annuities within employer-provided plans as a way to fortify with retirement security, but acknowledges severe regulatory impediments, which both the life insurance industry and the NAIC are striving to overcome with regulatory and legislative action.

The report, released by the Insured Retirement Institute (IRI) this week, found that workers who convert a portion of their accumulated assets into a guaranteed income stream can effectively manage many of the risks inherent to the defined contribution retirement system such as longevity risk, volatility and sequence of returns risk, as well as excess withdrawal risk.

The Guaranteed Lifetime Income Options within Employment-Based Plans report said research by IRI shows baby boomers value guarantees, and the value to a person of those guarantees increases with a person’s age, the IRI said.

And, according to Prudential Financial research, deferral rates climb to more than 10 percent of income from 7.3 percent when guarantee products are included. That amounts to almost a week-and-a-half of salary a front because the employees feel protected – and they also stay invested during market volatility with guarantees around target date funds, according to Hartford-based Jamie Kalamarides, SVP, institutional investment solutions at Prudential Retirement, part of Prudential Financial, in a follow-up interview to the IRI report.

According to BlackRock’s Annual Retirement Survey: What Retirees Have to Tell Us About the New World of Retirement, 89 percent  of participants agree they would like their plan sponsor to provide them with income-generating options in their retirement plan and 85 percent find the idea of a fund that automatically converts savings to guaranteed income in retirement appealing. Purchasing guaranteed income products through the employer’s plan provides participants with lower costs due to group purchasing, the IRI said in its report.

With regard to volatility risk, during the several years before and after their retirement date, market volatility can be especially harmful to retirees because they have less time to recover and a larger asset base at risk. Annuities with their guaranteed income distribution options can help stabilize at least part of a retiree’s income and can provide longevity protection, according to the IRI report.

IRI President and CEO Cathy Weatherford wrote that, “With an increasing amount of consumers agreeing that annuities are a critical component of a retirement strategy, there is an appetite for these types of options. In fact, nine in 10 workers would like for their plan sponsor to offer an income-generating option within their retirement plan. And so there is a tremendous opportunity here for the insured retirement industry and plan sponsors to work together to make guaranteed lifetime income options more accessible and tangible.”

Varied government research shows most boomers, among all age groups analyzed, lack knowledge on investing in securities. A large majority of boomers, a little over 80 percent in all age categories, reported they are somewhat knowledgeable to not at all knowledgeable of investing in securities. While less than one-fifth of Boomers report they were very knowledgeable to extremely knowledgeable about investing in securities.

As a result, retirement products that include guaranteed income features could play an important role in the retirement plans of most Americans,” stated the IRI study.

But one of the benefits to consumers also proves to be a hurdle on the regulatory front.

Purchasing guaranteed income products through the employer’s plan provides participants with lower costs due to group purchasing. Participants also benefit from the screening process employers use in selecting service providers for their plans, the study stated.

However, this creates challenges for employers with regard to their fiduciary liability.  

The DOL’s Employee Benefits Security Administration (EBSA) adopted final rules effective December 2008 meant to help employers understand what they must do to satisfy their fiduciary obligations when choosing to offer an annuity option in their plans, but some plan sponsors fear it is too vague and that it is not watertight–that is, it does not offer them enough protection in saying they are fulfilling their fiduciary role.

The rules include a requirement that employers conduct a detailed review of an insurer’s financial condition and conclude that insurer will be able to meet all of its long-term commitments. The rules established a safe harbor for the selcetion of annuity providers for benefit distributions from Employee Retirement Income Security Act (ERISA)-covered individual account plan.

However, is hard to do with guaranteed income products  presented to employers, who not trained to understand insurance products and industry solvency, who in many cased feel weighed down with legal liabilities under the fiduciary standard, looking at the long-tail obligations of the insurer. This is a serious deterrent for a plan sponsor seeking to reach enrollees or even hand out educational materials.

Plan sponsors are concerned that any attempt to educate participants about these products and provide relevant information could create potential fiduciary liability, either because the information might be deemed “investment advice” under ERISA, or because any deficiency in such information could constitute inadequate disclosure and/or misrepresentation about a plan product or feature. 

Plan sponsors also need to know that companies offering products are secure to fulfill their fiduciary responsibility.

“We know the National Association of Insurance Commissions has recently become actively engaged in working with the Department of Labor to address selection and monitoring issues,” stated Lee Covington, IRI’s general counsel.

Indeed, the NAIC and the life insurance industry are trying to persuade the DOL advisory group that state insurance regulators have a sound, conservative financial solvency regulatory regime that protects consumers in an effort to get the guaranteed lifetime income/withdrawal products under a bona fide safe harbor under ERISA’s fiduciary rules.

“We view this collaboration as a positive development and are hopeful that policymakers can alleviate plan sponsors’ concerns so that they can make guaranteed lifetime income options more accessible to plan participants. We also understand that the DOL has been taking some steps forward toward its goal of enabling workers to obtain information about the lifetime income levels that they can expect from their retirement savings.  This is also very encouraging,” Covington said in a statement to National Underwriter Life & Health.

The NAIC is considering options that would help employers become more comfortable with the soundness of the annuity providers included in the DOL safe harbor.

Life insurers are banking on GLWBs (guaranteed lifetime withdrawal benefits) products as an important strategic element in plan portfolios to provide certainty of needed income in retirement as people live longer. As life expectancy increases, ensuring income through retirement is crucial, the industry and regulators all agree, and they are trying hard to convince regulators of plan options to reduce obstacles for lifetime income products.

Tennessee Insurance and Commerce Commissioner Julie Mix McPeak has previously testified on behalf of the NAIC before the Advisory Council on Employee Welfare and Pension Benefit Plans, giving assurances of state regulatory supervision under the NAIC’s risk-based capital system, market conduct exams to protect consumers and model laws addressing suitability of annuity sales.

The NAIC also addressed concerns about how states deal with troubled companies and how, in the event of an insolvency,  the state receivership laws give policyholders priority over most claimants, while state guaranty funds cover an insured’s financial obligation to policyholders, annuitants, beneficiaries and third-party claimants up to statutory limits. 

The NAIC had been asked by the council to “provide an overview of state insurance regulators’ oversight of the life insurance and annuities industry” to the panel. 

The NAIC formed the ERISA Retirement Income Group headed by Jim Mumford of Iowa, a deputy commissioner  and annuities oversight official and held its inaugural meeting at the Fall National meeting outside Washington on Dec. 1, 2012. 

The  NAIC group’s charges are to meet with representatives of the DOL, the White House Council of Economic Advisors (CEA), the U.S. Department of the Treasury and any other appropriate federal agencies, in coordination with the NAIC Government Relations Leadership Council (GRLC), to consider possible options for easing plan sponsor concerns with the financial soundness of annuity providers as related to the DOL annuity safe harbor plan sponsor selection of annuity provider and fiduciary responsibility requirements.

The working group hasn’t met yet this year and the NAIC has not been approached regarding testifying at the DOL March 1 meeting.

“The DOL could help plan sponsors by clarifying that they will not face fiduciary liability for providing educational materials to their plan participants. The DOL should develop and distribute a model disclosure that would accompany an illustration of the product and therefore mitigate the fiduciary responsibility of the plan sponsor,” the IRI report said.

A specific safe harbor has been suggested, as well as vouchsafing by insurance regulators.

Life insurers say that if the experts on insurance solvency — the state insurance regulators with their army of actuaries — sign off on them, that should be good enough to make fiduciaries comfortable, and that the DOL should clarify the current safe harbor regulation to make sure it applies to these products.

“We believe that the current safe harbor regulation should be clarified to ensure its application to the broadest array of guaranteed lifetime income products, such as guaranteed minimum withdrawal benefits, and sufficiently broad to encourage, rather than chill, innovation, as providers work to develop new products in response to employee concerns and preferences,” Srinivas Reddy, senior vice president, institutional income for Prudential Retirement, testified before the Advisory Council in late summer.

Kalamarides said Prudential “completely agrees” with the IRI study but he downplayed the regulatory issues as temporary impediments, not blockades.

There is already a safe harbor around annuity providers, he said. Nothing prevents a plan sponsor from offering these products and many are in fact doing so, he said. Many large, well-known organizations like Konica Minolta, and United Technologies  Corp. are, and understand and are comfortable with the guarantee products, Kalamarides said in an interview. More are expected to join them, he said. 

However, some plan sponsors are so risk-averse, they are waiting, he said. We are looking for further clarification from DOL, and the NAIC is talking to them, making sure there are consistent standards across states, he said.

Can legislation be far behind? 

Kalamarides also anticipates legislation from this Congress, the 213th, on the importance of in-plan lifetime income options within defined contribution plans. He said the U.S. House and the U.S. Senate are on board, but must deal with the pressing issues of the day first.

Legislation could be introduced as early as this spring, one person familiar with the matter said, and will address DOL-ERISA-fiduciary issues that dampen some plan sponsors comfort with certain insurance and annuity products.

In the Senate, Sen. Tom Harkin, D-Iowa, authored a plan in July on treating the retirement crisis in U.S. under the auspices of the Senate Health Education Labor & Pensions (HELP) Committee he chairs, and would be poised to introduce any such legislation before he retires in 2014. The HELP Committee just held a hearing today on ”Pension Savings: Are Workers Saving Enough for Retirement?

“We need to do more to help American families cope with this looming retirement crisis. Hardworking Americans deserve to be able to rest, take a vacation, and spend more time with their grandkids when they get older. But to do so, they need to have better opportunities to save prior to retirement,” Harkin said in his statement to the committee today.

 The retirement income deficit – i.e., the difference between what people have saved for retirement and what they should have at this point – is $6.6 trillion, the retirement paper began. It proposed automatic participation on retirement plans managed by professionals. 

Roughly 75 million people do not have access to workplace retirement plans and small businesses can often not afford them. 

The industry is busy to take advantage of all regulatory and legislative actions, and has been developing so-called “middleware” to increase portability of plans between plan providers by making it a cheaper for insurance companies to do so. 

From a public policy standpoint now, “The goal of retirement plans is not accumulation – the goal is lifetime income – we don’t save just to hoard,” Kalamarides said. This is the goal of annuity guarantee products, he and others in the industry have said.

Note: A former version of this article said the DOL adopted rules in 2012 meant to help employers…, referrign to the final 2008 law, published here