Defined contribution industry divided over how to provide lifetime income information

The defined contribution industry is fractured over the best way for plan executives to illustrate how accrued benefits can be converted into an estimated lifetime stream so plan participants don't outlive their savings.

Industry members are debating among themselves and with Labor Department officials over explaining lifetime income calculations without leaving themselves vulnerable to lawsuits, impairing new-product development or creating unrealistic expectations for participants.

“There's widespread support for the idea of a lifetime income illustration,” said Lew Minsky, executive director of the Defined Contribution Institutional Investment Association, Washington. “People have all sorts of views on the best way to get there.”

The internal debate includes whether such lifetime income spending illustrations should be mandated, and what legal safe harbor the DOL should offer when projecting account balances and converting current and projected account balances into lifetime income streams.

“You need some basic universal standards,” said Edmund F. Murphy III, head of defined contribution at Putnam Investments, Boston. “While you don't want to have the Wild West, you also don't want to stunt innovation and creativity.”

One point of contention is whether descriptions about lifetime income should be based on annuitization or some form of asset drawdown. Another is what formulas should be used for investment returns, inflation and other factors in participant materials.

The debate was prompted by release of a document rarely used by the Labor Department — an advance notice of proposed rulemaking, the regulatory equivalent of the DOL thinking out loud. The notice was published in the Federal Register in May, and public comment was accepted through Aug. 7. Industry observers speculate the department will issue proposed regulations early next year, which will lead to another round of public comment before final rules are enacted.

Labor Department officials are using the notice to try “to figure out ways to provide guidance quickly. It's a way to get feedback before issuing a proposed rule,” said Larry Goldbrum, Washington-based general counsel for the SPARK Institute Inc.

Still, he conceded this extra step means “we are looking at a drawn-out process.”

In their public comments to the DOL, industry participants agreed lifetime income illustrations should be considered education. They say the DOL should make sure this information — such as lifetime income calculators and retirement spending projections — cannot be interpreted as advice and thus potentially subject to lawsuits claiming breach of fiduciary duty. “Fear of fiduciary exposure, whether real or not, will keep people from acting,” Mr. Minsky said.

One example of the industry's split is within the membership of DCIIA, a trade group formed by money managers that includes investment consultants, record keepers and others. DCIIA's comment letter was the product of a 50-member task force, and opinions on such issues as a DOL mandate were “all over the place,” Mr. Minsky said.

“Some DCIIA members question whether a mandate is the best way to get there,” DCIIA's comment letter states. “It would be hard to envision a mandatory structure that could be dynamic enough to cover the various online tools that have been developed in recent years ...”

However, other DCIIA members support mandating “a narrowly defined income project element in the benefit statement,” the letter said. Among these members, a mandate would provide “consistency and credibility” through “standardized assumptions and factors used to calculate lifetime income. It also might reduce implementation costs,” the letter said.

“We don't support mandates on principle,” said Edward Ferrigno, vice president for Washington affairs for the Plan Sponsor Council of America. “Any time you have a mandate, you have new fiduciary exposure.”

PSCA's letter also argued against illustrating lifetime income as an annuity income stream. Any proposed rule should allow different types of projections “to assist individuals in assessing if they are saving adequately for retirement — not to promote one distribution option over others.”

Another subject that divides the retirement industry is whether sponsors should provide to participants their current balances or a projection in the lifetime income illustration materials.

“I was surprised at the divergence of opinion among our members,” said Kathryn Ricard, senior vice president for retirement policy at Washington-based ERISA Industry Committee, a trade group representing large employers.

“Now, we give you actual facts” in participant statements, Ms. Ricard said. “We are concerned about giving projections. You can't guess how much an employee will gain or lose (in the future) or how much an employee puts away.”

Officials at ERIC and several other organizations question whether the Labor Department has the legal authority to require sponsors to provide projections on lifetime income. They cite a provision of the Employee Retirement Income Security Act that requires a benefit statement to indicate a participant's total accrued benefits. “We do not believe (this provision) authorizes the (Labor) Department to require projection,” ERIC's comment letter said.

“Under ERISA, the accrued benefit under a defined contribution plan is "the balance of the individual's account,' “the letter said. “In contrast, (the DOL) seeks to require much more than simply the account balance ... We do not believe a reasonable reading of the term "benefits accrued' can include those future additions that have not yet been made — and in many cases will not be made.”

The SPARK Institute also raised questions about the DOL's authority. Members of the trade group have differing views on projecting retirement income and providing that information to participants, Mr. Goldbrum said in an interview.

“Reasonable professionals disagree about what is the appropriate approach,” Mr. Goldbrum said.

The DOL's discussion of the potential role of safe harbors provoked disagreement within the DC industry. Although trade groups often welcome — and even request — safe harbors as a way to guard against ERISA lawsuits, many aren't sure when it comes to lifetime income illustrations.

“Many of our members would like a flexible safe harbor,” said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, Washington.

Some council members say uniform mandated assumptions will help avoid participant confusion, but others want the DOL to issue a standard of “reasonableness” to allow, for example, the use of different interactive tools to help participants figure their retirement spending, Ms. Jacobson said.

“Sponsors tend to favor safe harbors, but in this case what the department has proposed is so narrow that there is the fear that sponsors would limit and reduce the interactive tools” for calculating lifetime income, added SPARK's Mr. Goldbrum. n