‘Safer’ harbor for annuities can help fix retirement woes

Americans are living longer into retirement, but the financial solutions needed to support them have not kept pace with their needs. With a number of bipartisan proposals currently under consideration, the U.S. Congress has the opportunity to take significant steps toward solving these retirement challenges, including ensuring more Americans have access to tools that will guard them against outliving their retirement savings.

With defined contribution retirement accounts, such as 401(k)s and 403(b)s, increasingly taking the place of defined benefit pensions, retirees have become dependent on savings that are often inadequate to fund their retirements. Recent studies put the "retirement income gap," the difference between the amount of money retirees have saved and what they need to maintain their standard of living in retirement, at $7.7 trillion. In addition, retirement savings are subject to market volatility, interest rate fluctuations, longevity risk and escalating retiree health-care expenses.

One solution to this problem is a product that economists agree to be one of the only providers of guaranteed income outside of Social Security and pensions — annuities. But a key uncertainty has been the appropriate process that fiduciaries should follow when evaluating the financial strength of an insurance company that would provide an annuity. Evaluating the financial strength of any given annuity provider can be a complex process. While the intention of the existing safe harbor is to simplify this process, it lacks the clear guidelines that many plan fiduciaries desire and, for that reason, many plan fiduciaries are reluctant to adopt in-plan annuities, even if they and their plan consultants understand the value annuity products can deliver to their employees.

Without more explicit guidance, it is likely, as the U.S. Government Accountability Office noted, that concerns about legal risks may, "deter many plan sponsors — typically employers that provide 401(k) plans and establish investment and distribution options — from offering lifetime income options."

This is why we recently testified before the U.S. House of Representatives Subcommittee on Health, Education, Labor and Pensions in support of legislation to amend ERISA. The Retirement Enhancement and Savings Act contains a number of critical reforms to our nation's retirement system that include establishing clear and objective guidelines that can help plan fiduciaries choose an annuity provider for their plan with the confidence that they have met the guidelines. The proposal does this by allowing the plan fiduciary to rely on representations that an insurer is licensed to offer guaranteed retirement income contracts and has met certain regulatory requirements under state insurance regulations. In essence, it allows fiduciaries to rely on the true experts in evaluating an insurer's financial strength — the state regulatory bodies.

RESA boasts strong bipartisan support in Congress. We have much work to do secure the financial future of those retiring today and tomorrow, but passage would help ensure that more Americans will have an institutionally priced, in-plan annuity option that will allow them to use some of their retirement savings for its intended purpose — providing a steady stream of retirement income they will not outlive.

Tim Walsh is senior managing director of institutional and endowment distribution at

TIAA-CREF.