I read Investment Advisor regularly and certainly enjoy the articles and commentary. Every once in a while, however, I sense a self-serving bias from someone being interviewed or serving as a source of information. This is somewhat ironic given such thoughts are rather antithetical considering the subject matter.
Please be careful on all matters concerning employer-sponsored retirement plans, fiduciary duty and the Employee Retirement Income Security Act of 1974, or ERISA. (See New Thinking on an Old Problem, which highlighted a study by the Stanford Center on Longevity and Society of Actuaries about how to “pensionize” 401(k) plans and IRAs to solve the retirement income dilemma.; the chief author is Steve Vernon.)
There are too many self-serving proxies in the insurance industry trying to mask themselves under the guise of wealth management, financial planning and retirement planning. This is not to say that insurance products and services are not useful, as they certainly are; but they are tools on a toolbelt to be utilized at a specific time for a specific purpose.
For clarification purposes, defined contribution (or DC) plans are not retirement income vehicles but retirement savings vehicles. Eventually, the assets in this retirement savings vehicle may be part of a distribution strategy via a product, feature or an action deemed allowable/suitable by the IRS.
Many DC plans have scale, which gives the plan sponsor/investment committee the opportunity to freely negotiate fees and the investment landscape. Smaller plans increasingly benefit from competing companies in their demographic which have technologies that can reduce costs.
Even so, why would anyone acting in a fiduciary capacity think that it is prudent for a person/participant to pay for a tax-deferred product in a tax-deferred vehicle with features that they are not using?
Furthermore, a fiduciary should consider the sophistication and the “hidden” fees of these products and whether they can be explained in a way that most participants can understand.
In addition, why would an employer sponsor of a retirement plan or investment committee want to increase their oversight behaviors and liability, by allowing these vehicles in most DC plans?
Perhaps, however, the best way to comprehend such considerations is to express them as they would be considered a class action; “What viable and prudent methodology was applied to determine that annuities, a specific provider, and its income features, would increase the likelihood that participants would be able to retire in the lifestyle of their choosing?”
It seems like annuity providers and their proxies seem to justify the presence of their products by highlighting benefits (like income) that the participants don’t need yet.
Consider a parent with three active kids and a spouse visiting a car dealership with the expectation to purchase an automobile suitable for their busy life. However, this person purchases and drives a Corvette off of the lot because the salesperson convinced him/her of the benefits.
Yes, it looks cool, it is fast, and it turns “on rails.” But the consumer/participant is being sold a product with features that he or she doesn’t need — not for their own benefit but for the benefit of the salesperson.
There doesn’t seem to be room for deceptive sales practices and “buyer beware” in matters of fulfilling fiduciary duty and retirement planning in general. Income can be realized when needed by way of a specific strategy via a product or feature not at the expense of returns while the assets are in the accumulation phase.
There is a presence in the financial services/insurance Industry and legal profession promoting this nonsense who sit on committees that try to impress the public with their academic and professional stature. They even do so by calling themselves experts and offering their highly suspect perspectives to the public.
When you look underneath the hood, they have little subject matter expertise with regards to portfolio construction/wealth management, analytics, fintech and the application of regulation. It just seems more prudent to allow a mechanic, with “hands-on” experience, under the hood.
Neal Shikes writes The Trusted Fiduciary blog and is head of a firm of that does design and forensic consulting for employer-sponsored retirement plan, fiduciary consulting and expert-witness services.