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Retirement Planning > Saving for Retirement

The Way Forward in Lifetime Income Options

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At a mid-August meeting of the Labor Department’s ERISA Advisory Council, industry officals met in Washington to discuss how to boost plan sponsors’ use of lifetime income options in retirement plans.

Fred Reish, partner at Drinker Biddle & Reath, recommended in his testimony that the Advisory Council “focus on enabling a wide range of solutions and on creating flexibility for future developments” in the lifetime income space. “If allowed, the creative genius of the marketplace will provide solutions.”

The financial services industry, Reish said, has provided “a wide range of ‘solutions’ to fulfill the accumulation and decumulation needs of plans and participants,” including target date funds, managed accounts, managed payment funds, individual annuity contracts and guaranteed minimum withdrawal benefits and guaranteed lifetime withdrawal benefits.

“It is likely that other products and services will be developed in the future,” Reish continued. “As a result, recommendations by the Advisory Council should not prefer any product or service over another, nor should it be limited to current solutions; instead, the recommendations should be neutral as to products and services and should allow freedom for new solutions to be developed.”

While the focus of defined contribution plans primarily has been on the accumulation of retirement accounts, “it is now shifting to ‘decumulation,’” Reish noted, “that is, a stream of income after retirement — largely because of the aging of the baby boomers and their ongoing retirements.”

Both Reish and Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council, detailed to the council what they view are the “numerous obstacles” to lifetime income options in workplace retirement plans — including fiduciary liability, lack of demand by participants and the need for greater education.

“A clear, simple safe harbor is a necessary first step to increase the interest of plan sponsors in adding lifetime income options to their plans,” Dudley said.

Dudley reported to the council results of an ABC informal poll of its plan sponsor members regarding lifetime income products. Of the 93 company responses received, only 13 (or 14%) indicated that their organizations offer a lifetime income option as part of their defined contribution retirement savings plans.

Of the 76 organizations that do not, almost two-thirds might consider such an option in the future; for these organizations, the leading cause of hesitation was “potential fiduciary liability,” followed closely by “lack of demand from participants,” Dudley said.

In response to a question about the most useful potential policy change to address these concerns, the most popular answer was setting up a “better safe harbor for selecting an annuity provider,” to protect employers from lawsuits under ERISA’s fiduciary standard. “With this low demand for lifetime income options, employers may be hesitant to take on potential fiduciary liability for an option for which few employees have expressed an interest,” Dudley told the panel.

While new investment products “are promising,” Dudley said, “more needs to be done to familiarize plan sponsors with the pros and cons of lifetime income options and to help them educate their participants on how to use these products effectively.”

Labor’s Interpretive Bulletin 96-1, which provides detailed guidance on the difference between investment advice and investment education, “has been very useful for both plan sponsors and participants, resulting in increased investment education that otherwise likely would not have been provided,” Dudley said.

She suggested expanding the bulletin to cover “education on the management and spend down of retirement benefits,” which “could have a similar effect on educating participants on the concepts they will need to know for the retirement phase.”

Reish told the advisory council that “the greatest impediment” to the inclusion of retired participants in defined contribution plans and to the introduction of new products and services into those plans “is the fear that plan sponsors have of being sued for a fiduciary breach.”

Those fears include, according to Reish: possible increased damages when retirees continue to have money in a plan; claims of fiduciary breaches when a plan sponsor changes to another recordkeeper, resulting in a loss of guaranteed benefits; and litigation about annuities provided by insurance companies if their financial condition weakens.

“As a result, plan sponsors prefer safe harbors where compliance is objective and obvious,” Reish said.

The “labels” for participant-directed defined contribution plans as creators of wealth and as savings plans, also need to be “redirected to 401(k) retirement income plans,” Reish said. “That includes both a change in terminology and a change in presentation.”

For instance, Reish continued, “the plan document most widely read by participants is the quarterly statement, which shows a lump sum balance in the participant’s account and the investments held by the participant—in other words, the participant’s retirement ‘wealth.’” Most participants view their 401(k) plan in terms of the account balances and their investments, Reish added. “Unfortunately, that easily leads to participant decisions to take lump sum distributions (and roll over to IRAs) without giving thought to the impact of the decision on lifetime income. In addition, participants generally have little or no concept of the monthly income value of an account balance, either in terms of payments in the short term (if the participant is close to retirement) or payments in the long term (if the participant is younger).”

Reish suggested that the Advisory Council recommend that the DOL “begin actively discussing and presenting defined contribution plans as generators of retirement income.”

Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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