The mere mention of “Department of Labor” these days is, for agents and advisors, likely to invoke thoughts of overbearing, career-killing regulations. But not everything the DOL does has so negative an impact. Indeed, the industry has often benefited from DOL rulings on regulatory gray areas needing clarification.
A recent example of this is a December 2016 DOL letter to TIAA authorizing the use of delayed liquidity fixed annuities as a non-qualified default investment alternative option in targets-date funds of employer-sponsored retirement plans. Though failing to meet ERISA liquidity requirements — after a 12-month, restriction-free period, funds invested in these annuities can be transferred to another investment only in installments over an 84-month/7-year period — the DOL determined that plan fiduciaries could “prudently select an investment with lifetime income elements as a default investment under the plan if it complies” with ERISA law.
Upshot: Plans sponsors can replace the traditional fixed income component of a target-date fund (typically a bond portfolio) with a delayed liquidity annuity (in TIAA’s case the Target Date Plus “annuity sleeve” of the company’s Income for Life Custom Portfolio). In so doing, the swap avails plan participants of a guaranteed rate of return and guaranteed lifetime income at retirement. In exchange for TIAA’s 84-month restriction on access to funds, plan participants can also enjoy a higher payout rate than they otherwise can secure on fully liquid annuity sleeve (TIAA Traditional) already allowed under ERISA rules.
To learn more about the DOL’s green-lighting of these products in qualified plans, implications for insurance and financial service professionals and TIAA’s go-to-market strategy, LifeHealthPro interviewed Timothy G. Walsh, senior managing director of Institutional investment & endowment distribution at TIAA. Walsh’s team provides wholesaling and product consulting across internal TIAA channels and external channels for the TIAA & CREF annuities, income products, custom QDIA solutions, endowment & foundation and plan giving solutions, as well as Open Architecture Menu Construction Services. The following are excerpts.
LHP: Can you provide some background on the DOL letter? How long has their response been in the works?
Walsh (pictured at right): We’ve been working with the department for 2.5 to 3 years about improving the Pension Protection Act of 2006 to allow a delayed liquidity but higher yielding fixed annuity to be incorporated as a default investment option within a target-date fund. The legislation intended to promote such innovation, and we’re very encouraged by the DOL’s positive response.
The DOL states in its letter to TIAA that the use of a delayed liquid, but higher-yielding annuity can be considered a prudent default investment option in a target-date fund. (Photo: Thinkstock)
LHP: What does the delayed liquidity feature mean for plan participants?
Walsh: The participant can liquidate assets out of the default option at least once every 90 days. Because the default provides a safe harbor for participant-directed dollars into an employer-sponsored plan, the original legislation included that 90-day provision.
LHP: Did the DOL letter meet what TIAA was seeking or are there ongoing concerns?
Walsh: The Department of Labor never meant for the original PPA legislation to be black-and-white: to “stop at the water’s edge” by only allowing for fully liquid annuities as a default option. The DOL states in its letter that the use of a delayed liquid, but higher-yielding annuity can be considered a prudent default investment option in a target-date fund.
This is an attractive option for baby boomers entering retirement who want guaranteed lifetime income for a portion of their nest egg, while also providing for long-term appreciation and capital preservation. The use of a delayed liquid guaranteed annuity provides these twin benefits. Because it pays out in installments, the annuity can invest in longer duration, longer maturity products that tend to offer higher yields.
For example, the delayed liquidity version of the TIAA fixed annuity, Target Date Plus, provides a higher crediting rate — about 50 to 75 basis points more — than our immediate liquidity product, TIAA Traditional. Over a retirement plan time horizon of 20 to 30 years that difference will lead to a higher account balance and greater higher income replacement in retirement.
LHP: As the DOL has given the green light for this option, what’s TIAA’s go-to-market strategy?
Walsh: Our strategy is to enable plan sponsors and their consultants to use annuities in a target-date structures. These funds have become the default of choice for most plan participants; billions of dollars have flowed into these products.
We’re now able improve on target-date funds by substituting a delayed liquidity annuity for the traditional bond exposure of a traditional target-date fund. That’s of value to plan sponsors and benefits consultants who want to be able to a choice in yield to plan participants. Prior to the DOL letter, only a fully liquid version was available to them.
LHP: Who are TIAA’s plan sponsor customers? Do they span different industries?
Walsh: the bulk of our business is in serving not-for-profit organizations. Many among them, such as institutions of higher learning, have long incorporated immediate liquidity annuities in their 403(b) retirement plans. Now they can avail employees of a higher-yield payout option.
Most retirement plan participants exhibit inertia; they tend to stay invested in the employer-sponsored default investment option. (Photo: iStock)
LHP: In your experience, do most plan participants stick with the default investment option?
Walsh: What we’ve seen in respect to off-the-shelf target-date funds is that inertia takes over: People tend to stay invested in the default option. For 70 to 80 percent of employees, the default is typically fully liquid and portable to another retirement or IRA.
From TIAA’s perspective, we do want participants to become more engaged by personalizing their retirement plan. To that end, we have a comprehensive communications strategy to encourage them to work with a financial advisor.
LHP: How does the default option work if, say, the plan participant is invested 70 percent in equities and 30 percent in fixed income, and wants to do a rollover to another employer-sponsored plan or an IRA?
Walsh: If the plan participant is using a fully liquid fixed annuity, the assets can be moved to another retirement investment vehicle. The fixed annuity can also be left as is if the participant is interested in maintaining a pension-like defined benefit.
If the 30 percent is in invested in a higher yielding but delayed liquidity annuity, the participant can move the money in installments over a 7-year period. But, again, the money can stay put if the individual wants to maintain the benefit.
LHP: Can you speak to the range organizations you’re interfacing with that might be interested in lifetime income option for target-date funds?
Walsh: In January of 2017, we launched Custom Default Solutions, Target Date Plus Models and Target Income Models, which let plan sponsors and/or their third-party consultants develop the models — the selection of investment options and glide paths — and assign participants to the models using TIAA’s recordkeeping platform. Unlike one-size-fits-all target-date funds, these solutions allow plan sponsors to create customized asset allocation and income solutions to better meet the needs of their employees.
Since we came to market with these solutions, 24 clients have signed up for them and more prospects are in the pipeline. The DOL letter will help to increase that prospect base. We’re also encouraged by the engagement of independent consultants in promoting the offerings.
LHP: Might other types of annuities, such as fixed indexed or variable products, be incorporated into the custom solutions?
Walsh: Near-term, we’re making variable annuities available through TIAA-CREF accounts. We’ll be looking at other options down the road, depending on what the market wants us to build. Our clients have always focused on fixed and variable annuities. If we start to get demand for fixed indexed annuities, we’ll absolutely consider them.
Despite a common belief among plan participants, target-date funds don’t provide guaranteed income in retirement, says TIAA’s Tim Walsh. (Photo: Thinkstock)
LHP: How has the product rollout been received since the January launch?
Walsh: A lot of the consultants we work with see the new solutions as a natural evolution of employer-sponsored retirement plans. Over the last 20 to 30 years, there’s been a progression from defined plan pensions plans to defined contribution plans.
DC plans often include target-date funds that simplify the investment decision-making process for employees. But despite a common belief, they don’t provide guaranteed income in retirement. In addition, many defined-contribution plans focus on account value and rates of return, rather than creating a sustainable and secure stream of retirement income.
TIAA research has found that 49 percent of Americans say their retirement plan’s number one goal should be to provide guaranteed monthly income in retirement. But 41 percent are unsure if their current plan provides an option for lifetime income.
Add to this the fact that government regulators like the DOL are increasingly to looking to help participants secure their retirement. So we see that a lot of factors underpin this natural evolution in retirement plans — an evolution that will lead to additional improvements in target-date funds.
LHP: The industry is also witnessing digital automation in the workplace: online tools that help employees get educated about and make retirement plan selections. In respect to income distribution options like TIAA’s custom solutions, do you expect these tools will complement or, perhaps over time, supplant that of agents and advisors?
Walsh: We absolutely believe that digital automation will play a key role, but a complementary one. Participants typically are unengaged at the outset and so opt for the plan sponsor’s default option.
But we at TIAA do want them to engage. Digital strategies and tools can help them understand potential options, but they then reach an inflection point when they want to create a more personalized, custom solution. It’s at this point when the personalized advice of a financial professional is needed to help them through important decisions. So we foresee a combination of digital and in-person advice being used at the workplace.