Surveys show that many plan participants are interested in a retirement income option with their 401(k) plans.
A recent Cerulli report noted that sponsors also have an interest in evolving 401(k) plans from savings accounts to retirement income vehicles in the mold of defined benefit plans. One route is to include a managed payout scheme as part of a target-date product. Another option is to offer in-plan annuities that can replicate a traditional pension’s payments.
Adoption continues to lag interest, however. The Plan Sponsor Council of America’s 59th Survey of Profit Sharing and 401(k) Plans, compiled with 2015 plan-year results, reported that only 5 percent of surveyed 401(k) plans offered a guaranteed retirement income product. The PSCA’s 60th survey (2016 results) found a slightly higher result but still only 10 percent of plans offered an annuity.
Fiduciary Concerns Still Dominate
Survey respondents cited fiduciary exposure as the major reason they weren’t working with guaranteed retirement income products. It’s a valid concern, according to Paul Richman, vice president, government affairs, with the Insured Retirement Institute. He explains that, under current regulations, plan sponsors “must take responsibility for determining whether the annuity provider will be able to satisfy all obligations under the contract. As such, plan sponsors must either invest considerable time and resources to learn the technicalities of insurer solvency regulation (time and resources which could be better spent growing their own businesses) or simply leave these valuable products out of their plans.”
James Szostek, vice president, taxes and retirement security, with the American Council of Life Insurers, shares that viewpoint. He says employers want to offer annuities in plans, but often lack the expertise or the resources to make a fully informed decision when selecting an annuity provider for their plan. Also, there’s the threat that a selection the plan makes will be legally challenged years in the future even if the chosen annuity provider made perfect sense at the time of selection.
The big stumbling block today is the requirement that employers, in their role as fiduciaries, must determine whether “an annuity provider is financially able to make all future payments under an annuity contract,” Szostek adds. “This standard is difficult to meet, in part, because it is hard to know how to draw this conclusion.”
Recent lawsuits over fees and other fiduciary issues certainly have caught plan sponsors’ attention, says Robert Melia, executive director of the Institutional Retirement Income Council. The resulting legal worry and fiduciary concern has caused benchmarking, review of funds and review of fees. Consequently, many plans to revert to what he describes as the “vanilla” approach in their plan design, investment fund line-up, matching or profit-sharing contribution rate and fees. That approach also extends to their retirement income offerings, he believes.
A Congressional Solution?
Szostek believes the solution is legislation that gives employers an improved annuity selection “safe harbor” and a clear approach for selecting an annuity that reduces exposure to potential litigation. Therein lies the hope for in-plan annuity advocates. Bipartisan legislation has been introduced in the House and Senate that could help clarify the safe harbor regulations and provide plans with that clearer path to including annuities.
Both H.R.4604, Increasing Access to a Secure Retirement of 2017, and S.2526, Retirement Enhancement and Savings Act of 2018, address the challenges plan sponsors now face in offering in-plan, guaranteed lifetime income options for participants, says Richman. The bills include multiple retirement-related items, but the clarification of annuity selection safe harbors and contract administration has earned widespread support among industry groups and insurers. For example, the RESA bill states that a fiduciary that satisfies the safe harbor requirements “shall not be liable following the distribution of any benefit, or the investment by or on behalf of a participant or beneficiary pursuant to the selected guaranteed retirement income contract, for any losses that may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the terms of such contract.”
“It’s unclear which legislative route will develop to get a bill enacted into law, but the desire is there,” says Szostek. Doug McIntosh, vice president of investments for Prudential Retirement also sees a positive environment. “We’re very hopeful that there will be movement on those [bills] and a few other issues that we think will be helpful for the retirement income space,” says McIntosh. “I don’t know that I could handicap the actual likelihood of any of them passing. I will note, though, that there are bicameral bills in both Senate and House and they were sponsored by members of both parties. We take great comfort in that; those are very good signs.”