Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. DEFINED CONTRIBUTION
November 13, 2017 12:00 AM

Embedded annuities return to the table

Treasury Department report highlights need despite long-held concerns of plan executives

Robert Steyer
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    David Toerge
    Lori Lucas said in-plan annuities, while a nice feature, are not in especially great demand.

    The Trump administration has revived discussion of a retirement plan strategy that has bedeviled defined contribution executives for years — embedding annuities in DC plans.

    Most DC plan executives resist incorporating annuities or other lifetime income options into their plans, fearing they will be held accountable as fiduciaries if insurance providers fail to meet their obligations or go bankrupt.

    "Despite the benefits that annuities can provide, they are not widely offered in defined contribution plans," said a Treasury Department report issued Oct. 27 on multiple financial, legal and regulatory issues, including retirement income. The fear of being sued under the Employee Retirement Income Security Act is "the principal deterrent to offering an in-plan annuity option."

    To address this concern, ​the Treasury and Labor departments should "develop proposals on how to establish or certify one or more expert, independent fiduciary entities to assess the long-term financial strength of annuity providers," the report said.

    These assessments "could be in the form of ratings or other specific metrics," the report said. They "could assist ERISA-governed plan sponsors in complying with their fiduciary duty obligations in selecting annuity providers for plans and enable fiduciaries to rely on such assessments as a safe harbor."

    Rule would be helpful but ...

    Although DC industry members said a new rule would be helpful, it wouldn't automatically lead to plans or participants embracing in-plan annuities. The current rule, enacted in 2008, hasn't encouraged many sponsors to offer this option.

    "Based on input from others, my assessment is that for many — perhaps most — plan sponsors, adding this additional insight concerning insurer financial strength will not change the equation from a net 'con' to a net 'pro' with regard to in-plan annuities vs. other in-plan income solutions," said John M. Towarnicky, executive director of the Plan Sponsor Council of America, Chicago.

    Noting insurance-rating agencies already exist, Mr. Towarnicky said: "A company's financial strength at the time of an annuity purchase is no guarantee of financial stability." He recommended the DOL create "enabling guidance" that would describe "what steps sponsors have to take to have an income payout strategy."

    This approach was cited by the Government Accountability Office in a 2016 report on how the DOL could improve retirement income options. The DOL should "clarify" the annuity safe harbor "by providing sufficiently detailed criteria" to comply with the rule "relating to assessing a provider's long-term solvency," that report said.

    Mr. Towarnicky said the most recent PSCA survey found only 5% of sponsors had a retirement income guarantee within their plans. Another 12% said they were considering adding a lifetime income product. The report, published in December 2016, contained 614 responses.

    Fiduciary exposure, cost, operational issues, the lack of portability and risk exposure were primary reasons cited by members for eschewing in-plan lifetime income products, he said.

    In-plan annuities "are a nice-to-have rather than a must-have," said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan LLC. "There are so many must-haves that the nice-to-haves get pushed down the to-do list."

    The biggest impediment is the DC executives' belief that in-plan annuities aren't necessary or aren't a priority, said a January 2017 Callan report based on a survey of 165 clients and non-clients. Other reasons were fiduciary concerns, the belief that in-plan annuities would cost too much for the plan and participants, the fear that participants wouldn't want or need in-plan annuities, and insurance risk.

    The report said 3.8% of respondents offered an in-plan retirement income product, such as annuities, and 1.9% offered longevity insurance last year.

    "Any improvement in the safe harbor would be well-received," said Ms. Lucas, emphasizing a new regulation is only part of the answer. "You need motivated plan sponsors. You need to incentivize them to encourage adding retirement income solutions" to their plans.

    Update safe harbor

    The DOL asked for public comments on lifetime income solutions in 2010 to update its 2008 safe harbor rule. Some sponsors that offer in-plan retirement income products view this rule as providing sufficient protection, but most disagree.

    "Many employers and their professional advisers are not comfortable relying on the (2008) safe harbor," the Treasury Department report said. Terms describing fiduciary duties "are not defined," and the rule requires sponsors to "reach conclusions about the solvency of an annuity provider years or decades into the future."

    ERISA attorney Bradford Campbell conceded the 2008 regulation didn't work as hoped.

    "Most people viewed it as a recitation of prudence — not an objective checklist," said Mr. Campbell, Washington-based counsel for Drinker, Biddle & Reath LLP and a former assistant secretary of labor for the Employee Benefits Security Administration during the George W. Bush administration.

    Mr. Campbell said the DOL, rather than the Treasury, would be the best agency to develop a new safe harbor rule to "protect participants, cut off frivolous lawsuits and encourage more innovative products."

    However, he wondered how fast the Labor Department could act because "so few political decision-makers in the Trump administration have been put in place." Most notably, Mr. Campbell's old job has been vacant since Phyllis Borzi left in January at the end of the Obama administration.

    Last month, President Donald Trump nominated Preston Rutledge — who has been tax and benefits counsel for the Senate Finance Committee since 2011 — as his EBSA chief. The Senate Health, Education Labor & Pensions Committee will hold a hearing on the nomination Nov. 15.

    The Labor Department announced in 2014 that it was working on safe harbor rules, according to the Treasury Department report, but "the DOL has not issued any proposals to replace or amend the safe harbor." Mike Trupo, a Labor Department spokesman, declined to comment. Ms. Borzi could not be reached for comment.

    "I don't know why there was no traction on this," said Robert Austin, the Charlotte, N.C.-based director of research for Alight Solutions, referring to the absence of a broader safe harbor.

    He speculated the DOL devoted so much time on developing the fiduciary rule and other matters such as fee transparency that time ran out on the Obama administration before the department could propose rules. Other experts interviewed by P&I shared that view.

    In recent years, regulators have acted to ease participant and sponsor concerns about in-plan annuities.​

    For example, the IRS said in October 2014 that target-date funds containing deferred annuities won't violate rules against DC plans discriminating in favor of higher paid employees, as long as other IRS guidelines are followed.

    QDIA ruling

    The DOL said this ruling meant such target-date funds could serve as a qualified default investment alternative. And in 2015, DOL issued formal guidance on sponsors' fiduciary responsibilities in monitoring an annuity provider's financial health.​

    Still, the annuity safe harbor "remains the No. 1 area cited for concern among sponsors," said J. Mark Iwry, a non-resident senior fellow at the Brookings Institution, Washington.

    The Treasury Department recommendation "is what we were espousing for several years," said Mr. Iwry, the former Treasury Department deputy assistant secretary for retirement and health policy during the Obama administration. "I'm delighted to see it."

    From 2010 to 2017, "we pressed hard to make lifetime income in plans part of the system," he said. "We wanted to take down barriers and modify rules to accommodate annuities"​ in retirement plans. Mr. Iwry has mixed opinions about responses to the absence of an expanded safe harbor. "For many sponsors, the concern is genuine," Mr. Iwry said. "For some other sponsors, it's more in the nature of an excuse not to provide annuities in their plans by going to the trouble and rolling up their sleeves" to offer such an option.

    Another big issue discouraging sponsors from acting is "they don't see their employees clamoring for annuities," he added. "So many experts in the field recognize the value of lifetime income, and they know participants will appreciate it once it's made available to them."

    Related Articles
    DOL's Borzi on the fiduciary rule: There is no going back
    One size doesn't fit all in dealing with DOL's rule
    Officials urge careful steps in dealing with fiduciary rule
    New reality of retirement income
    Lack of education cited in low takeup of Roth plan option
    Annuity issue must be addressed
    Employers, employees diverge on what financial wellness programs should be offe…
    BlackRock: DC participants most concerned about monthly income in retirement
    Commentary: Like it or not, annuities are coming to retirement plans
    Financial health at center of data gathering effort
    New law could be answer, but doubts persist
    Recommended for You
    parliament 1550_i.jpg
    U.K. considers CDC model for multiemployer plans
    British-Union-Jack-Parliament_i.jpg
    New U.K. regulations allow DC plans to increase illiquid investments
    ONLINE_180109908_AR_0_OXQTDCTVBIGZ.jpg
    Inadvertent error in SECURE 2.0 legislation prevents 401(k) catch-up contributions
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing