Retirement income products should be treated as a separate asset class in defined contribution lineups, alongside such assets as equities, fixed income and alternatives, said an April 3 report by the Milken Institute.
“Separately defining an investment solution as an asset class helps investors compare products and provides a framework for decision-making,” the report said.
“In-plan lifetime income solutions have no clear comparison and often result in an ‘apples-to-oranges’ comparison to other investments with fundamentally different investment goals due to their unique combination of features,” the report said.
“This makes the analysis by plan sponsors more challenging,” said the report, written by Cheryl L. Evans, a director of Milken Institute Finance, and Mairead Treanor, senior associate of finance at Milken.
The authors wrote that “it is important to distinguish in-plan lifetime income solutions from other financial products, such as retail annuities.”
While acknowledging there is “no universal definition of a distinct asset class,” they added that “financial experts and economic journals generally outline new asset classes as categories of financial products that exhibit similar characteristics, performance, liquidity, and risk profiles.”
Despite the growth of in-plan retirement income products, sponsors and participants must better understand them, to offer and use them, the report said.
“Plan sponsors want more information to share with participants/employees, including straightforward explanations of the solutions, transparent fee structures, and a better understanding of the solutions themselves,” the report said.
“Some plan sponsors are wary of the reputation and limitations of retail annuity products and conflate the two,” the report said. “Other plan sponsors are concerned about assets leaving their plans.”
The authors also recommended improvements in federal safe-harbor provisions to make sponsors more comfortable in offering lifetime income products.
Despite safe-harbor provisions in the SECURE 2.0 Act of 2022, "it is clear that a substantial number of plan sponsor employers have been reluctant to offer in-plan lifetime income options due to concerns over triggering fiduciary breach lawsuits or other legal issues,” the report said.
“This fear is exacerbated by the varied designs available and unique attributes preventing these solutions from neatly fitting into any traditional asset class,” the report said. “To put it simply, plan sponsors may be unclear on how to satisfy their fiduciary obligations of prudence and loyalty.”
Current law creates a “gray area, making sponsors unsure if they are following all fiduciary obligations, the authors wrote.
“We believe the current safe harbor provisions could be more specific regarding what plan sponsors need to do to satisfy their requirements and be more inclusive regarding their application,” the report said. “It may not be clear how or whether plan sponsors can rely on the safe harbor for lifetime income solutions that are not structured as traditional annuity contracts.”
