The passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act and, in some ways, the market crash caused by the COVID-19 pandemic have put a greater focus on providing guaranteed lifetime income for defined contribution (DC) plan participants.
On the second day of the 2020 PLANSPONSOR National Conference, experts in guaranteed retirement income held a virtual discussion about the momentum for annuities in DC plans and what plan sponsors should consider.
When it comes to including guaranteed income in retirement plans, the industry has seen movement and change to the positive, said Kelli Hueler, founder and CEO, Hueler Companies. “Far more plan sponsors are looking at guaranteed income and trying to design multiple alternatives to help plan participants create income,” she said. “One central thing that we’ve seen is older participants are much more concerned about guaranteed income than younger generations.”
Insured retirement income investments in DC plans have not taken off, but that day is coming because of the SECURE Act and the way plan sponsors are starting to think about their plans, said Bob Melia, executive director, Institutional Retirement Income Council (IRIC).
He said a 2016 study found 25% of plan sponsors think about retirement income vehicles in their plans and intend to take action. By last year, 30% of plan sponsors said the same thing. “They are starting to understand the inclusion of a guaranteed income solution is a plan design settlor function and that it is better for recruiting and retaining people. It’s not only a retirement outcome tool—it’s a workforce management tool,” he said.
“It was a day of celebration when we heard that SECURE Act was passed, even though it lost some of its front-page momentum when the pandemic hit,” said Geoffrey E. Dietrich, executive vice president, Dietrich & Associates.
Dietrich said his firm grew from the pensions space, “and we really are a large part in helping preserve those pensions.” He added: “We have to change the perception about retirement plans. Employer-sponsored retirement income is going away with the loss of traditional DB [defined benefit] plans, but now we have a generation of 10,000 Baby Boomers retiring per day.”
Dietrich said “annuity” can be perceived as a bad word, but there’s value in the strategy. He said appreciation for annuities starts with awareness.
Dietrich noted that he likes the aspect of the SECURE Act that deals with income disclosures on participant statements because it creates awareness, “if we figure out the right way to do that.” The comment period for the DOL’s guidance on lifetime income disclosures just opened. “It will be interesting to see what results come from the comments. There is a lot of concern about the basis for assumptions and whether the disclosures will be too generic for participants,” he said.
Hueler said plan sponsors have not been informed about guaranteed income. They’ve received promotions but not education. “It’s hard for them to navigate in-plan versus out-of-plan options, and what’s appropriate for their participant demographics,” she said. “In addition, being illiquid, just the word ‘annuities’ strikes some fear, but sponsors have a host of reasons to be interested now. Their motivation in the past few years is just to do the right thing [for participants].
“We see it as perhaps being included in a default investment. That’s the future for resolving this lack of take-up issue,” Hueler added. “And helping participants relate retirement income to household finances is part of it. It’s sort of their own personal pension.”
The insurance, asset management and advisory sides of the retirement plan industry, which have often battled over retirement plan assets, have started to collaborate and work on what’s best for participants, Dietrich said.
There are already a number of recordkeepers that offer guaranteed retirement income products for plan investment menus, and the more the demand, the more there will be, Melia said. He added that there’s a software company currently developing a service to work between recordkeepers and insurance companies to facilitate the provision of guaranteed income in retirement plans.
Plan Sponsor Responsibilities and Product Considerations
The SECURE Act also addressed many issues with holding guaranteed income in DC plans, including the issue of portability. As an example, Melia noted that if a retirement plan participant held assets in an in-plan retirement income vehicle which accumulated a high value, but the plan sponsor wants to change recordkeepers, liquidating the vehicle and transferring it to a new plan provider could cause a great loss of value to the participant. Now, with the SECURE Act, the participant can get his annuity out of the plan and have it with the insurer so its value is preserved.
The SECURE Act provides retirement plan fiduciaries an optional safe harbor with respect to selecting an insurer for guaranteed income vehicles, which protects them from liability for any losses to participants, Melia said. He explained that, basically, insurers provide plan sponsors with a testimonial that they comply with state regulations and that they’re audited every year. “As long as plan sponsors take this documentation, they are covered by the safe harbor,” Melia said.
“It’s about as good a safe harbor as one could ask for,” he added. “It addressed the primary concern for plan sponsors when thinking of providing guaranteed income in their plans. I think that issue is resolved now.”
Hueler said she believes some plan sponsors are not going to be comfortable with just taking a statement from insurers. “I don’t think anyone will let go of the process of evaluating and documenting per ERISA [the Employee Retirement Income Security Act],” she said. “I encourage plan sponsors to take the safe harbor as a good step forward with very clear protection, but continue to use someone with well-vetted procedures in place to evaluate and monitor annuities so they are well-covered as far as fiduciary duties.
“In-plan guaranteed lifetime income and out-of-plan solutions are structurally different,” Hueler continued. “It’s difficult to have multiple offerings in-plan. If you think about it, the structure is proprietary to recordkeepers, and that has made this development slow. Right now, the contract is written to the plan and the plan sponsor is the fiduciary.”
Dietrich said there are flexible features in annuities, and the plan sponsors and annuity providers won’t know what features participants will favor until there are more of them using annuities. “The selection of what is offered in DC plans should be based on what participants need or want—there are lots of features, such as return of premium or death benefits—but I think we should keep it simple,” he suggested.
Melia agreed that guaranteed income options in DC plans should be in the simplest form. “The issues of return of premium, death benefits and how to manage risk should be left to the retail space,” he said.
Both variable and fixed annuities have pros and cons. Fixed annuities pay the same amount each month, while variable annuities pay an amount that depends on the investment performance of the investments held by the particular annuity. When a participant purchases a fixed annuity, he is yielding control over the underlying assets to the backer of that product. He could live to 105 and still be paid. With a variable product, there is potential upside and the participant always has access to the underlying assets during the accumulation phase, which can be useful if he faces unexpected needs.
Melia said he believes fixed annuities are better for retirement plans. “Some plans now use variable annuities, and it may help people when the market crashes, but if people who are 60 to 65 just hold less equity, they would be better off than in a variable annuity,” he said.
From an employer perspective, if the workforce is mostly blue-collar and labor intensive, a fixed annuity would help the company manage its workforce, he added. “As workers get older, they will have a higher retirement readiness and can move on,” Melia said.
For plan sponsors who have put in the effort creating and implementing custom target-date funds (TDFs), paying more money to get access to the market in a variable annuity might make sense for them, Hueler said. But, for those that don’t have those skills, fixed annuities should be considered.
Hueler’s word of wisdom to DC plan sponsors is, “We are just getting started. We don’t have to have everything in place. But, guaranteed retirement income is a real need right now.”
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