Council Makes Recommendations for Including Lifetime Income Options in QDIAs

The Advisory Council on Employee Welfare and Pension Benefit Plans, referred to as the ERISA Advisory Council, has sent a report to Secretary of Labor R. Alexander Acosta focusing on recommendations for promoting lifetime income (LTI) within defined contribution (DC) plans through changes to the annuity selection safe harbor and modifying the qualified default investment alternative (QDIA) rule to focus on asset accumulation and decumulation issues in the context of LTI needs and solutions.

Based upon testimony received during two days of hearings supplemented by written material submitted from interested stakeholders, the Council said it observed:

• No single product or plan design is likely to address decumulation needs for all DC plan participants. This issue arises from differences in general financial circumstances, account sizes, assets held outside of plans, health profiles, age, gender and marital status. To meet these variable needs, plans may need different solutions.
• Plan sponsors may be deterred from incorporating LTI features within QDIA options because QDIA regulations remain ambiguous in several areas, including liquidity requirements and the ability to limit participation to particular demographic groups, e.g., participants of a specific age or length of service.
• Plan sponsors remain challenged in incorporating LTI options due to fiduciary concerns around selecting and monitoring an annuity issuer. Plan sponsors generally seek an objective and uniformly applied safe harbor. No witnesses before the Council suggested standards for such a safe harbor. Several witnesses broadly supported potential and pending legislative proposals that would materially modify the fiduciary framework; however, this legislation is beyond the Council’s scope and remit.
• Inconsistencies and disparities across LTI products and administrative platforms hinder LTI utilization.
• As discussed in prior Councils’ reports, participants would benefit from clear and unbiased education and information related to DC plan asset decumulation strategies. Plan sponsors may be more inclined to provide this information if they were certain that providing such information would not constitute investment advice.
• The complexity of the LTI topic masks the fact that plan design offerings, such as a Social Security bridge option or installment payout, could be accommodated today on most recordkeeping platforms at limited cost.

As for pending legislative proposals regarding an annuity selection safe harbor, speakers at a recent Brookings Institution event suggested that those proposals miss the mark and agreed that a financial strength criterion asking how sound is an annuity carrier should be a critical part in any annuity selection safe harbor for defined contribution (DC) plan sponsors. However, the ERISA Advisory Council recommended that the Department of Labor should publish guidance confirming that a named plan fiduciary may appoint a 3(38) investment manager to select and monitor annuity and other LTI providers for DC plan decumulation, as well as accumulation. ”Specifically, applying the fiduciary responsibility scheme of ERISA section 3(38) in which the plan fiduciary only has responsibility for the prudent selection and monitoring of an independent expert would address many plan sponsor concerns about fiduciary liability,” the Council says in its report.

The Council notes that the QDIA regulations tangentially address LTI and the DOL’s guidance has generally been informal. In 2016, in an information letter to Christopher Spence, senior director, Federal Government Relations at TIAA, the DOL said a DC plan could prudently choose a default investment for the plan that contains lifetime income elements.

The Council concluded that amending QDIA regulations to specifically address LTI could incent plan sponsors to adopt innovative QDIAs, including QDIAs with LTI options. It says such changes should address the permissibility of including fixed annuities, living benefits and other LTI approaches in a QDIA; address the importance of tailoring QDIA options to affected participants, similar to rules applicable to QDIA balanced funds. (It specifically recommended that the DOL clarify that sponsors may default participants into different options based on participant demographics because plan populations may not be sufficiently similar for a single default to be universally appropriate); maintain the current transferability and liquidity requirements, but clarify whether living benefits satisfy these requirements; and address the extent to which charges may be imposed if they have the effect of limiting liquidity and/or transferability.

The Council further concluded that plans offering different kinds of distribution options could have a positive material impact on participants’ retirement income. Including these distribution options are settlor decisions and these options are readily available on most recordkeeping platforms at modest cost. The Council said it believes more plan sponsors would adopt multiple distribution options if the DOL clarifies that offering multiple distribution options is a business decision made in a settlor capacity and this decision is exempt from fiduciary liability. It recommends that the DOL encourage plan sponsors to adopt plan design features that facilitate LTI, including, but not limited to: allowing participants to take ad hoc distributions, enabling installment payments, providing Social Security bridge options and allowing for payment of required minimum distributions.