Lifetime income proposals spur a lot of debate, but no solution being offered so far
There is renewed optimism in Washington that a retirement reform package will pass Congress in 2019. And while there's broad support for provisions contained in several proposed bills, such as expanding multiple employer plans and easing non-discrimination rules for frozen defined benefit plans, there are differing opinions with respect to lifetime income.
The Retirement Enhancement and Savings Act has garnered support from all corners of the retirement industry as well as both Republicans and Democrats, but no action has been taken in the last two congressional sessions.
Last month, Reps. Ron Kind, D-Wis., and Mike Kelly, R-Pa., reintroduced the bill in the House, and a Senate counterpart is expected soon.
On the subject of lifetime income, RESA would create a stronger safe harbor for sponsors seeking to evaluate the health of insurers providing these in-plan products, let participants more easily transfer their in-plan assets, including an annuity, to an individual retirement account without paying taxes on those amounts, and would set guidelines for sponsors' educating participants on how their balances translate into a post-retirement income stream.
The last provision has garnered the most debate.
Exactly what sponsors should tell participants about how long their retirement nest egg might last has troubled regulators for years.
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, but never issued a regulation.
Under RESA, the DOL would issue a rule outlining "a single set of specific assumptions" or "ranges of permissible assumptions" for an annual retirement income statement that sponsors would be required to send to participants.
Fiduciaries wouldn't be liable if they follow the rules governing a model lifetime income disclosure document developed by the DOL.
Will Hansen, chief governmental affairs officer at the American Retirement Association, a retirement industry trade group in Washington, said the disclosure provision would be a burden to plan sponsors and bring confusion to participants.
"It's yet another disclosure that they are mandated to provide that will increase compliance burdens," Mr. Hansen said. And since a majority of employers do not currently offer lifetime income products, the nest egg figure will "lead to confusion among plan participants on whether or not that type of product is offered," he added.
While the bill does not mandate a lifetime income product within a given plan, the disclosure figure must mimic an annuity product, Mr. Hansen said.
"Our employers, being large plan sponsors who provide a variety of benefits and have a very diversified workforce, do not like one size fits all," said Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington. And while ERIC does not object to a disclosure, "we would prefer that it include flexibility to allow employers to provide a disclosure that is appropriate for its workforce," she added.
Paul Richman, vice president of government affairs for the Insured Retirement Institute in Washington, favors the disclosure provision and dismissed claims that it would force sponsors into offering a lifetime income product. "The bill does not say you must buy an annuity," he said. "There are other products out there. It's just a statement to give you an illustration of how much your nest egg will produce on a monthly basis."
Citing a 2015 IRI study that found 90% of consumers would like to have information about how much monthly income their retirement savings account may deliver and that 75% of consumers said the information would encourage them to save more, Mr. Richman said the provision is important for Americans planning their retirements.
Ms. Robinson said the disclosure would likely cause confusion because many ERIC members already provide a similar figure through an online calculator. "So if you have an employer that's already providing the online calculator, now they have to provide an annuity number, which is static on a piece of paper; it can be confusing to participants about what their benefit is," she said.
There's more consensus around a RESA provision that enhances an ERISA safe harbor protecting sponsors from fiduciary risk when selecting an insurer for an in-plan annuity. The bill would allow sponsors to rely on the judgment of a state insurance regulator to certify that an insurer has appropriate levels of risk capital and is not threatened by bankruptcy or insolvency, said Robert Melia, executive director of the Institutional Retirement Income Council, a Washington non-profit retirement industry think tank of plan advisers, consultants and service providers.
Mr. Melia, who favors both provisions, said there's pent-up demand for lifetime income products and once a safe harbor is adopted, more sponsors will offer in-plan options.
"I think (sponsors) have been waiting for this," he said. "Our industry was sort of our own worst enemy in creating a self-fulfilling prophecy by touting that the safe harbor might be on the way. It's caused plan sponsors to take a wait-and-see approach."
In 2008, the DOL issued a safe harbor that allowed sponsors to offer annuities to participants, but Mr. Melia said it didn't go far enough. Sponsors are hesitant to offer annuity products because "of the fiduciary risk that they feel they're taking on," he added.
Geoffrey Manville, principal, government relations at Mercer LLC in Washington, said there's an appetite in Washington to pass a retirement reform package. He noted that the Retirement Security and Savings Act, which was introduced late last Congress by Sens. Rob Portman, R-Ohio, and Ben Cardin, D-Md., is likely to get a lot of attention if and when it's reintroduced this session. A new version is of the bill expected this year, sources said.
The Portman-Cardin bill did not include RESA's lifetime income provisions but did aim to improve access to qualifying longevity annuity contracts, a type of deferred annuity that begin payment at the end of an individual's actuarial life expectancy.
Mr. Manville said if RESA doesn't move forward as currently constituted, its lifetime income provisions "could be incorporated into the Portman-Cardin bill at some point."
Also, if RESA does advance, lawmakers could reach a compromise on its disclosure provision, Mr. Manville added. That's something ERIC's Ms. Robinson is hoping lawmakers will be open to before a final bill is passed. "We are definitely pushing for changes," she said.
With the rise in defined contribution plans, lifetime income is an appealing notion for lawmakers, said Bradford Campbell, a Washington-based partner for Drinker Biddle & Reath LLP and former assistant secretary of labor for the Employee Benefits Security Administration.
"My suspicion is the concerns that people in Congress have about how much of the burden of retirement planning is being placed on individuals compared to the traditional pension system is a real concern that has a lot of traction in Congress, and annuities do offer some solutions to that," Mr. Campbell said.