Retirement Income | Published in April 2011

Solving a Very Real Problem

Five things to consider when evaluating retirement-income products

By Judy Ward | March 2011
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Illustration by Shout

Just 3% of defined contribution (DC) sponsors say they very likely will add in-plan annuity or insurance products in 2011, according to an Aon Hewitt survey; yet, hope remains in the industry that this could change in the years ahead.
“The plan sponsor community is increasingly mindful of the challenges their employees face in retirement in a defined contribution world,” says Mark Smith, a Washington-based Partner at law firm Sutherland Asbill & Brennan LLP. “I hope we are at a point where plan sponsors will put more time and attention into what they can do in plans or around plans to deal with that.”

Despite lots of employer curiosity, adoption has been slow largely because of these products’ complexity, says adviser Martha Tejera, President of Tejera & Associates, LLC, in Bainbridge Island, Washington. “However, target-date funds seemed complicated at first too,” she says, “and these types of solutions have the ability to solve a very real problem.”

For employers considering in-plan options, think about these five factors:

Consider waiting for a safe harbor. Fiduciary worries have long played a major part in employers’ unwillingness to add annuities as an in-plan option. The regs have become somewhat clearer, but not clear enough for most sponsors.

“The Pension Protection Act (PPA) restricted the ‘safest available annuity’ standard to defined benefit plans and specified that a different standard would apply to annuities in defined contribution plans,” Smith says. The Labor Department subsequently published annuity guidelines for DC plans that did not persuade many employers to move forward. “There is, fairly, a fiduciary concern here,” he says. “To the extent that we are adding a feature to the plan that has a long tail to it—20, 30 years, maybe more—is that a different sort of decision than sponsors are used to making?”

A wide range of plan sponsors—corporate, public, and multiemployer—have a definite interest in offering in-plan options, says Jeffrey Snyder, a New York-based Consultant at Segal Advisors. “However, there is a hesitancy until a safe harbor is granted,” he says. That could happen sooner rather than later, believes Mark Foley, a Vice President at Prudential Retirement. He points out that the U.S. Department of Labor has identified retirement income as one of its regulatory priorities for 2011.

Evaluate the investment basics. “Under the safest-available-annuity rule for defined benefit plans, we have treated the annuity decision as different from everything else. For defined contribution plans, however, the PPA established that the annuity purchase decision is subject to normal fiduciary standards,” Smith says. “The foundation is a prudent decisionmaking process, governed by the same principles that sponsors are used to. There are additional elements to this decision, but the fact that it is a long-term decision is already within the scope of fiduciary practice.” The evaluation process for picking a retirement-income investment product with a guarantee differs less from typical plan investments than the process for choosing fixed annuities, Foley says.

Retirement-income product selections are comparable to other investment options, Tejera says, but have unique aspects. “They are subject to the standards of ERISA, so they have to have a sound due-diligence process, but it needs to be expanded,” she says. “The piece that is similar is the evaluation of the efficacy of the investment process. A lot of these products allow participants to continue to invest in the market. So, evaluate: How strong is the investment process? Are the investments appropriate? Can participants diversify? Is the glide path appropriate for participants? What is the performance of the underlying investment managers?”