Participant confusion about annuities, the varying prices and fine print that accompany existing products, and plan executives' worries about legal issues and fiduciary responsibility are impediments to offering lifetime income options in defined contribution plans, responses to the Labor Department show.
Some 700 companies, organizations and individuals responded to the DOL's request to answer 39 questions on how retirement plans can best help participants go from accumulating assets while they're working to guarding against outliving their assets after they retire.
For many major players in the defined contribution business, more government guidance and/or regulation is a remedy for their uncertainty. “We support prudent regulation,” Bertram L. Scott, an executive vice president at TIAA-CREF, said in an interview. “You have to have clarity.”
There's no guarantee, however, that the DOL will propose regulations, and there's no timetable for the department to act, said Gloria Della, a Labor Department spokeswoman. “We wanted to find out what was going on in the marketplace,” she said. “There's no preconceived notion.”
The Labor Department's request for comments was spurred by the movement away from defined benefit plans in favor of defined contribution plans, the DOL said Feb. 2 in the Federal Register.
In addition, “many traditional defined benefit plans have converted to lump-sum-based hybrid plans, such as cash balance or pension equity plans, and many others have simply added lump-sum options,“ the DOL said. The result is a “trend away from annuities toward lump-sum distributions,” placing greater planning responsibility on employees.
The number of lifetime income options offered by DC plans is modest. A review of Towers Watson & Co.'s database of more than 1,400 large employers reveals only 20% to 25% offer the option, William B. Gulliver, managing director of North American retirement business, said in formal comments to the DOL.
He also cited the firm's 2007 survey of 5,000 employees and retirees, which found 10% of those covered by a DC plan “expected or actually received some portion of their benefit as an annuity.”
Reasons for such a response could include lack of participant understanding, poor sponsor communication, mistrust of annuities and expectation of higher returns in other investments, he said.
“Our work with plan sponsors indicates a strong interest to offer lifetime options,” Mr. Gulliver said. However, “concerns and barriers that currently exist ... have prevented plan sponsors from doing more in this area.”
TIAA-CREF, Towers Watson, the Spark Institute, the American Council of Life Insurers, AARP, the Defined Contribution Institutional Investment Association, the American Society of Pension Professionals and Actuaries and ING Group were among the respondents. Fiduciary responsibility was a concern of many, including a discussion of distinguishing participant education vs. investment advice.
“There are substantial regulatory constraints under ERISA, federal securities laws and state insurance laws that make it challenging for plan sponsors and providers to communicate effectively in "plain English' to participants about lifetime income solutions,” argued Larry H. Goldbrum, general counsel for the Spark Institute Inc., in his organization's filing with the DOL. “Plan sponsors are also concerned about crossing the line from providing participant education to providing advice and becoming an investment fiduciary.”
Mr. Goldbrum's organization wants the Labor Department to provide guidance “specifically stating that providing information about lifetime income options, available both inside and outside of the plan, is not investment advice,” he said. Without that, he warned, plan sponsors “will most likely be unwilling to provide” any information that would cause them to add fiduciary responsibility.
The ACLI expressed the same concerns. “A number of factors, including the current economic situation and lengthening life spans, have made it more important than ever to encourage employers to provide information about guaranteed lifetime income options and to educate their participants,” according to commentary filed by several ACLI executives including Walter Welsh, executive vice president for taxes and retirement security.
However, “plan sponsors are concerned that providing participants with information outlining the advantages of guaranteed lifetime income options could cross the line” between education and advice, the ACLI said.
“There are concerns that the investment education rules do not cover situations in which the plan sponsor provides information regarding the benefits and features of the plan's lifetime income options,” the ACLI comments said. The ACLI wants this information to be treated as education — in the same manner that discussions about diversification, asset allocation and risk tolerance are treated by regulators as education.