In a new report, “A Financial System That Creates Economic Opportunities,” the U.S. Treasury Department discusses the advantages of lifetime income products, i.e. annuities.
The department says that research from the Center for Retirement Research at Boston College has shown that half of working-age households may not be able to maintain their standard of living in retirement, primarily due to longevity risk.
“Although 401(k) plans and other defined contribution plans are important retirement savings vehicles, they differ from traditional pension plans in that 401(k) plans are designed and used primarily for asset accumulation rather than as a source of guaranteed income,” the Treasury Department says in its report. “In addition, only about two-thirds of private sector workers have access to any type of employer-sponsored retirement plan, and even workers enrolled in a 401(k) plan have limited access to guaranteed lifetime income under the plan.”The department notes that annuities are the only product on the market that offers guaranteed income, but employers “cite concerns over legal liability under the Employee Retirement Income Security Act (ERISA) as the principal deterrent to offering an in-plan annuity option.”
While the Department of Labor (DOL) issued a safe harbor rule in 2008 with respect to annuities, saying that employers who “appropriately” consider “sufficient” information as to whether the annuity provider will be able to make payments under the annuity contract will be protected from legal liability in the case that the insurer becomes insolvent, the Treasury says the terms are not clearly defined—and that the safe harbor still requires employers to consider whether the provider will be solvent decades into the future. Thus, Treasury says, “many employers and their professional advisers are not comfortable relying on the safe harbor.”
While the DOL subsequently issued a field assistance bulletin in 2015 on the selection of annuities, it did not specifically address in-plan annuities, Treasury says. Therefore, the Treasury Department says it, and the DOL, should “develop proposals on how to establish or certify one or more expert, independent fiduciary entities, to assess the long-term financial strength of annuity providers. These assessments, which could be in the form of ratings or other specific metrics, could assist ERISA-governed plan sponsors in complying with their fiduciary duty obligations in selecting annuity providers for plans.”
In addition, the Treasury Department says it supports the DOL’s fiduciary rule. However, “a delay in full implementation is appropriate until the relevant issues are evaluated and addressed to best serve retirement investors. Treasury supports the Securities and Exchange Commission’s (SEC)’s engagement on this topic and encourages the DOL and SEC to work with states to evaluate the impacts of a fiduciary rule across markets.
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