(updated with correction)
Developers of investment strategies designed to ensure participants don't outlive their retirement savings must feel it will take a lifetime before defined contribution plans buy what they're selling.
These in-plan lifetime income strategies range from annuities embedded in the plan to managed accounts that allow monthly drawdowns of balances upon retirement.
But many DC plan executives are reluctant to adopt these options because of questions about costs, product complexity and participant interest. Those at the largest plans fear they could be subjected to increased fiduciary liability, providers and consultants say. Indeed, most companies won't act until they get greater guidance from the Department of Labor, they say.
“The main obstacle is that the sponsors want a specific safe harbor” from the Labor Department to protect them against lawsuits if a provider fails to deliver or goes out of business, said Lori Lucas, executive vice president and defined contribution practice leader in the Chicago office of Callan Associates Inc.
She said DC plan executives “want a clear-cut list that outlines their responsibilities in choosing a provider. They want to know what happens if a provider doesn't meet its responsibilities.”
A Callan survey found 69% of DC plan executives were very unlikely to offer a retirement income option this year, and another 12.5% were somewhat unlikely to do so.
In term of current usage, Callan found, for example, that only 6.5% of survey respondents offered an in-plan annuity option last year.
“People keep waiting for regulations to happen,” said Robin Diamonte, chief investment officer at United Technologies Corp., Hartford, Conn., which launched a lifetime income option in June 2012 for its two 401(k) plans, now totaling $20.5 billion in assets.
“I don't think they realize how long it will take the Department of Labor” to act, said Ms. Diamonte, adding her company was satisfied that DOL rules offer adequate fiduciary protection.
Ms. Diamonte also is chairwoman of the Committee on the Investment of Employee Benefit Assets. She said a January internal poll of CIEBA members revealed that two-thirds of executives from large plans say lifetime income is a high priority.
The Labor Department sought public comment and held hearings in 2010 on lifetime income issues. In May, it published an advanced notice of proposed regulation, seeking more comment on how DC plans should illustrate to participants an estimated lifetime income stream of payments based on their account balances.
But any regulation will not address the question of whether plans get a safe harbor if they offer a lifetime income option.
Martin Schmidt, principal and client services director at HS2 Solutions Inc., Chicago, a retirement plan and technology consulting firm, said: “There's a level of interest by sponsors for lifetime income in general, but the industry needs to do better in showing tangible results and doing better communication.”