It is ironic that programs designed to provide retirement income pay so little attention to achieving this goal.
That’s right, for the vast majority of attendees today, creating that “paycheck for the rest of your life” is still a do-it-yourself business. To date, only about half of defined contribution plans currently offer members the option of establishing a systematic series of periodic payments, let alone an annuity or other retirement income option in the plan.
However, the need for this solution is widely recognized and there are new, albeit somewhat familiar, solutions emerging.
In October, BlackRock grabbed the headlines with news that it was not only building annuity contracts into a series of target date funds, but also had already lined up five big plan sponsors (with some 7, $ 5 billion in assets) to implement the option as a default.
This followed a few months the announcement in March of a consortium of suppliers (American Century Investments, Lincoln Financial Group, Nationwide, Prime Capital Investment Advisors, SS&C Technologies, Wilmington Trust, NA and Wilshire) that had collaborated on a new target in the Dated Series of Funds Plan with Integrated Lifetime Guaranteed Income. A series that is also purportedly “portable among major registrars where Income America 5ForLife is available”).
These announcements, of course, came in the wake of the SECURE Act, which included three specific provisions designed to overcome the reluctance of plan trustees (and plan members?) To adopt these options:
- Portability—Generally, it allows for special distributions of a “life income investment” when the investment is no longer permitted to be held under the plan, allowing a participant to keep the investment even if the plan sponsor changes registrar or decides to eliminate the investment from the plan line.
- Disclosures—Requires plans to give plan members projections of their current account balance as a monthly benefit using assumptions prescribed by the Minister of Labor, a provision designed to help plan members better understand what their projected retirement savings will produce in terms of monthly retirement income. Or, put it another way, to help them think about turning that retirement savings balance into that proverbial lifetime salary.
- Fiduciary Safe Harbor– which, in essence, provides that a trustee of a DC plan who chooses a “guaranteed life income contract” to offer as part of his plan will be deemed to have acted with caution if he follows a series of steps described in the law. This means that the trustee will not be liable if the insurance company subsequently breaches its obligation to the participants who invest in the contract.
It remains to be seen if all of this will actually make a difference – but they appear to directly address – and, at least potentially – resolve the issues that have long been put forward as objections to adopting lifetime income options in a plan. of retirement. menu. Indeed, both offers also address the more traditional objection to annuity products – their cost – if they actually work.
There is no doubt that plan members need help structuring their retirement income, and there is no doubt that a lifetime income option could help them (certainly with the help of a trusted advisor) . Packing a complicated product (and lifetime income is complicated) into a relatively simple product is certainly a way to ease acceptance. In addition, doing so with a product whose contributions are in default should certainly improve the rate of adoption by participants—if plan sponsors are inclined to make it available on this basis.