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Special Report: Retirement Income

New law may soothe concern about lifetime income options, but doubts persist

ERIC’s Will Hansen is not convinced the legislation would lead to increased adoption of in-plan annuities by DC plans.

RESA praised, but widespread use of retirement income offerings still seen as unlikely

Legislation before Congress could alleviate some plan sponsors' concerns about lifetime income options, such as in-plan annuities and guaranteed withdrawal benefit products, by reducing fiduciary-risk hurdles that have thwarted widespread adoption, retirement industry members say.

The Retirement Enhancement and Savings Act, known as RESA, would create a stronger safe harbor for sponsors seeking to evaluate the health of insurers providing these in-plan products. It has attracted support from groups as diverse as AARP and the American Council of Life Insurers. RESA also would let participants more easily transfer their in-plan assets to an individual retirement account, and it would set guidelines for sponsors' educating participants on how their balances translate into a post-retirement income stream.

Even if RESA is approved, however, DC experts said they doubted there would be a quick and emphatic embrace of in-plan retirement-income solutions by sponsors and participants.

"The safe harbor will help but it won't lead to widespread growth" for adopting in-plan products, said Douglas Fisher, director of retirement policy for the American Retirement Association, Arlington, Va., which is preparing a letter in support of the legislation.

Sponsors remain concerned about the expense and complexity of these products, Mr. Fisher said.

"A lot of sponsors believe defined contribution plans are accumulation vehicles," so they are less inclined to offer options that emphasize decumulation, he added.

Other industry officials say the uncertainty of participants' interest in using these options and sponsors' competing financial wellness choices — from health care to loans — could act as brakes on significant adoption.

"This will give sponsors a little more certainty," said Will Hansen, senior vice president for retirement policy for the ERISA Industry Committee, referring to the safe harbor proposal. "I don't know if this will move the needle on (in-plan) annuities."

Even with the safe harbor, sponsors will remain concerned about "frivolous lawsuits," he said, referring to the broad legal challenges by the tort bar on DC plans' fees, administration and investment decisions.

"Most of my clients don't even ask me anymore," said Robyn Credico, the Arlington, Va.-based defined contribution consulting leader for Willis Towers Watson PLC. In-plan options "are incredibly convoluted, and they're all hard to understand."

In a survey published in February, her firm asked plan executives about 25 investment menu items. Only 3% offered in-plan lifetime income options, tied for last place with out-of-plan lifetime income options. For the former, 93% said they were neither planning nor considering offering them; for the latter, it was 96%.

Improving prospects

Still, industry representatives said RESA is bound to improve prospects for decumulation strategies in which annuities or guaranteed withdrawal benefits are embedded in DC plans.

They said there's an encouraging dose of bipartisanship, especially in the Senate where, in 2016, the Senate Finance Committee voted unanimously for a similar bill. That bill never came before the full Senate or the House.

The latest version of RESA was introduced March 8 in the Senate, a companion bill was introduced March 15 in the House. RESA contains other retirement-oriented provisions affecting auto-enrollment and multiemployer plans.

"There's a good chance to get this enacted in 2018, but it's not a slam dunk," said Kent Mason, a partner in the Washington law firm of Davis & Harman LLP who specializes in retirement issues.

"The factors supporting a need for lifetime income solutions have been growing every year," said Mr. Mason, referring to the decline of defined benefit plans, the increased reliance on 401(k) plans and increased longevity.

Broader safe harbor

A key RESA provision is the broadening of an ERISA safe harbor that protects sponsors from fiduciary risk when they select an insurer for an in-plan annuity. Although the Department of Labor issued a safe harbor in 2008, most sponsors say it's not enough.

When Alight Solutions asked plan executives the major reason for avoiding in-plan products, 48% cited fiduciary concerns and 46% cited administrative and operational concerns, said a survey published inJanuary.Forty-one percent wanted to see more products and 34% cited doubts about participant interest as the major concern in a survey that allowed multiple answers.

The survey noted that most sponsors avoid in-plan options. For example:

  • No plans offered qualifying longevity annuity contracts, even though the Treasury Department relaxed rules in 2014. Eighty-nine percent said they won't offer QLACs.
  • Ten percent of plans offered annuities or guaranteed withdrawal benefit products in their investment lineups, but 86% of executives won't pursue this approach.
  • Also, 15% of plans offer managed payout funds within the plan — with no insurance guarantee. Among those that don't use this strategy, 81% said they have no interest in pursuing it.

RESA's supporters say the bill addresses the fiduciary risk dilemma by allowing sponsors to rely on state insurance commissioners' analysis of the solvency of insurers located in their respective states. Insurers must present to sponsors certificates of authority from state insurance commissions and prove they meet reserve requirements in all states where they do business.

Under the current safe harbor rule, sponsors are asked to determine if an insurer can meet its obligations during the life of an annuity contract.

Given the fiduciary risk and many sponsors' lack of resources to assess insurer solvency, most plan executives are saying, "If I don't have to do this, then why do it?" said James Szostek, vice president, taxes and retirement security for the American Council of Life Insurers, which endorses the proposed safe harbor.

The safe harbor earned AARP's support in a March 6 letter to Sen. Orrin Hatch, R-Utah, and Ron Wyden, D-Ore., both on the Senate Finance Committee. "The safe harbor is limited to determining the solvency of the selected insurer, and in no way changes the longstanding ERISA fiduciary requirements for prudent selection of an appropriate annuity product," wrote Joyce Rogers, AARP's senior vice president for government affairs.

Bradford Campbell, a Washington-based partner for Drinker, Biddle & Reath LLP, said the RESA proposal is more comprehensive than the safe harbor rule enacted in 2008 when he was assistant secretary of labor for the Employee Benefits Security Administration.

"Our intent was a procedural safe harbor, but it hasn't worked in practice," Mr. Campbell said. "It's too subjective. It didn't provide the protection that was needed."

One RESA provision that appears to offer little controversy allows participants in a plan with a lifetime income investment to roll it over to an IRA if the plan decides to drop the investment. "This preserves their benefit," said Mr. Szostek of the American Council of Life Insurers.

Income-stream puzzle

Another provision, however, is perhaps the most contentious component of RESA — covering what sponsors should tell participants about how long their retirement nest egg might last.

Regulators, sponsors and providers have struggled for years over sponsors' illustrating such an income stream. Among the points of debate: Mandate vs. optional? A formula based on an annuity or a drawdown? Using current balances or projections?

The Department of Labor investigated the matter in 2013, triggering a free-for-all of public comment and sharply divergent opinions from different industry groups and sometimes from within the same groups. The DOL never issued a regulation.

"The department was overwhelmed with information and comments," said Robert Melia, executive director of the Institutional Retirement Income Council, whose organization supports the RESA disclosure proposal.

"Nobody equates Social Security in terms of a lump sum," said Mr. Melia, adding that the RESA provision offers "valuable educational tool for retirement security."

The proposal says DOL may issue a rule outlining "a single set of specific assumptions" or "ranges of permissible assumptions" for an annual retirement income statement sent by sponsors to participants.

Fiduciaries wouldn't be liable if they follow the rules governing a model lifetime income disclosure document to be developed by DOL. The information "is only provided as an illustration," the legislation said.

Mr. Melia and other supporters said the RESA proposal is similar to what is now provided each year by the federal Thrift Savings Plan to participants.

The TSP annual statement has a callout box that asks, "Will you be ready for retirement?" It identifies the participant's year-end balance, noting the balance would provide a lifetime monthly amount that is based on several factors: assuming the participant is 62, or current age if older; using an annuity interest rate index; and assuming participants took a single life annuity with level payments and no additional features.

The statement emphasizes that the annuity estimate is not a guarantee.

"We were concerned that participants didn't really understand how their balances translated into a real monthly income," Kim Weaver, a TSP spokeswoman, wrote in an email.

"Translating the total sum into a monthly income amount helps provide a different perspective on the balance," she added.

AARP and ACLI like the bill's disclosure provision, but the ERISA Industry Committee doesn't because "it's a mandate imposed on sponsors," said Mr. Hansen. As written, it would interfere with communication between employers and employees, create additional costs and could cause confusion, he said.

His organization, which supports the rest of RESA, said the bill should be amended to avoid mandating a specific measurement. Instead, it should offer "educational information," including a link to a DOL calculator that could show participants the lifetime income stream based on their account balances, he said. Using DOL guidance, sponsors also should be allowed to offer their own financial education calculators, he added.

"Conceptually this (guidance on retirement spending) makes a lot of sense," said Mr. Campbell, the former head of the EBSA.

"The reality is there are competing interests in how you mandate disclosure," he added.

If RESA is enacted and the Labor Department writes a regulation, he added, "there will be a lot of hard questions to answer."