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Editorial

Renewed focus, action needed for defined contribution plan annuities

There is recognition that the need for income security in retirement is growing, mostly for people whose retirement benefit will come from a defined contribution plan.

Unlike the traditional defined benefit plan, which promised payments for the lifetime of the beneficiary, defined contribution retirement plans long focused on accumulation of assets, not on making those assets last for a lifetime. Annuities, embedded in defined contribution plans, have long been considered a possible solution.

There have been small steps toward easing plan sponsor concerns about in-plan annuities. An Internal Revenue Service statement in 2014 stated target-date funds containing deferred annuities won't violate rules against discriminating in favor of higher paid employees as long as other IRS guidelines are followed.

And in 2015, the Department of Labor issued formal guidance on sponsors' fiduciary responsibilities in monitoring an annuity provider's financial health.

But it is not enough.

In October, a Treasury Department report identified fiduciary risk under the Employee Retirement Income Security Act as "the principal deterrent to offering an in-plan annuity option." The same report said the Treasury and Labor departments should work together to mitigate this risk by developing proposals "on how to establish or certify one or more expert, independent fiduciary entities to assess the long-term financial strength of annuity providers."

While plan executives and others agree there are other factors — including cost, operational issues, the lack of portability and risk exposure — that contribute to keeping in-plan lifetime income products out of most defined contribution plans, it is important to keep the focus on how to increase opportunities for plan participants to have reliable income in retirement.

With the Senate's confirmation in late December of Preston Rutledge as assistant secretary of labor for the Employee Benefits Security Administration, the department now has leadership in place to start focusing on that issue and other priorities.

J. Mark Iwry, the former deputy assistant treasury secretary for retirement and health policy during the Obama administration, in October applauded the department for again focusing on the annuity safe harbor, which he called "the No. 1 area cited for concern among sponsors."

Mr. Rutledge, who is no stranger to these topics, appears to have support to move forward on this issue from within the Treasury and Labor departments, as well as from the highest levels of the Trump administration. We hope with that support he will, as Mr. Iwry told Pensions & Investments in October, "take down barriers and modify rules to accommodate annuities" in retirement plans.