6 Obstacles to Retirement Income Adoption

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective. Still, some have said that this could be the year for retirement income—a combination of new offerings, volatile markets, and rising interest rates—and yet, it still seems that there are obstacles to overcome. 

Here are six:

1. There is no legal requirement to provide a lifetime income option.

Let’s face it, it’s a full-time job just keeping up with the plan provisions, standards, participant notices and nondiscrimination tests that are required by law. The notion that a plan sponsor would, in the absence of a compelling motivation take on extra work, and work that carries with it additional financial and fiduciary responsibility as well, doesn’t seem very realistic.

Indeed, with no legal obligation to provide this offering, and an underlying concern that providing the option does involve taking on additional liability…

2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”

I’ve never met a plan sponsor who felt that the guidance on offering in-plan retirement income options was “enough.”

I’m not saying they’re not out there—clearly there are in-plan options available in the marketplace now, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. That said, industry surveys (still) indicate that only about half of defined contribution plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. 

Now, over the years the Labor Department has tried to ameliorate those concerns, as recently as Field Assistance Bulletin (FAB) 2015-02. Perhaps more significantly, among the key elements of the SECURE Act that sought to expand retirement income awareness/availability was a new safe harbor. Essentially it says that when a plan fiduciary of a defined contribution plan selects a “guaranteed lifetime income contract” to be offered under its plan, the fiduciary will be deemed to have acted prudently if it follows the steps outlined in the law. In other words, it provides a specific road map to follow[i], and if it’s followed, the new safe harbor means that the fiduciary will not be liable if the insurance company later defaults on its obligation to participants who invest in the contract. Basically, the fiduciary must obtain specified representations from insurance companies about their financial soundness (and not have any information that contradicts those representations).

Of course, that safe harbor emerged in the waning days of 2019—just ahead of COVID, the CARES Act, and a fair amount of workplace/workforce disruption. It seems fair to say that the implications of its guidance have yet to be absorbed by most plan sponsors. Will it finally be “enough?” Time will tell.

3. Operational and cost concerns linger.

While several industry providers have offered what seem to be workable, effective solutions to the “portability problem,” plan sponsors remain concerned that the cost and complexity of transitioning these offerings—either by individual plan participants, or the plan itself—would be daunting, at best.  And that doesn’t take into account the educational challenges. 

Granted, there are a host of new and newly-branded solutions in and coming to market (check out our recent Retirement Income Buyer’s Guide for some insights)—but there remains a “learning” curve, and, at least in some cases, an UN-learning curve—for plan fiduciaries, and those who advise them.   

4. Participants aren’t asking for it.

Once you’ve walked through all the objections[ii] to in-plan retirement income options, it all seems to come down to this. Despite industry surveys that suggest worker interest in the concept (if not the reality) of retirement income solutions, it never seems to get to the level of expressing that interest to those who actually make retirement plan design decisions.

Sure, most plan sponsors acknowledge that participants (certainly older, longer-tenured participants) could use the kind of help that a retirement income structure could provide, and yes, plan sponsors are (still) looking for a more secure safe harbor, and they’d certainly welcome a PPA-ish “nudge” (along the lines of QDIAs) in that direction. At the same time large employers, anyway, have expressed interest in helping workers retire “on time,” and there is apparently increasing interest in retaining participant accounts in their plans. All in all, it seems that those interests would be well-served by a prudent, well-executed solution to provide a reliable retirement income alternative. 

That said, until it becomes an articulated concern for the workers they hope to attract, retain and eventually retire from their workforce, it’s likely that the adoption rate—by plans and plan participants—will be slower than might be hoped.

5. Participants don’t take advantage of the option when offered.

The so-called “take up” rates among participants can be sliced in different ways—by provider (the options are varied, after all), by participant age, even by the involvement of the employer in positioning in the option—but however you parse it, the word I’ve generally heard to describe participant adoption rates is… “disappointing.”

Not that those dynamics can’t be influenced by plan design or advisor input, but justifiable concerns remain about fees, portability and provider sustainability. Moreover, there are significant behavioral finance impediments—be it the overweighting of small probabilities, mental accounting, the fear of losing control of finances, a desire to leave something to heirs, or simple risk aversion. It’s often not just one thing. It’s… complicated.

To its credit, the retirement income industry has pretty consistently tried to overcome the objections raised with a series of product innovations. Unfortunately, that process has tended to make the offerings more complex AND more expensive. One thing for sure—if it’s not TDF-easy/simple to use, participants won’t.

6. (Most) advisors (still) aren’t promoting it.

Plan design can surely help steer participants toward these options, but most advisors I’ve spoken with say that, for a variety of reasons (mainly cost and complexity) these retirement income options are still sold, and not bought. Beyond that, the current advisory focus seems more targeted on wealth management—a perfectly logical emphasis for those with enough wealth to warrant it, but arguably beyond the needs of many retirement plan accounts.     

As an industry, we bemoan worker inattentiveness to the sufficiency of their retirement savings accumulations—and that’s with the aid and assistance of workplace retirement savings education, defaults for decisions like contribution amount and investments, and increasingly the availability of a retirement plan advisor. 

But let’s face it: When it comes to making a decision about a lifetime income option, or even evaluating the option, most workers are—still—literally on their own.

- Nevin E. Adams, JD

 

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[i] See Guaranteed Income: The Impact of the SECURE Act

[ii] See 7 Reasons Retirement Income Solutions Stall

A Not-So-SECURE ‘Act’?

The headline in a recent New York Times piece cautions that “Confusing Options May Be Coming to Your 401(k). It Could Cost You.” 

Those “confusing options”? Retirement income. And, ironically, they might undermine support for the most significant piece of pro-retirement legislation in a decade.

In fairness, the article begins by acknowledging to its readers that there might soon be some “welcome changes to the rules governing their retirement savings plans,” but quickly moves on to take to task the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which not only brings with it those welcome changes, but a key element that has some consumer advocates all atwitter (literally) – a fiduciary safe harbor for the selection of a lifetime income provider.

For years the retirement industry has bemoaned the lack of a lifetime income option in defined contribution plans. Indeed, for all the vaunted talk of the so-called “DB-ification” of DC plans, the latter has largely steered clear of embracing what is arguably one of the most compelling elements of DB plan design (aside from the completely employer-funded and managed aspects) – providing a pension, a stream of lifetime income.

Of course, in a DB plan, the cost and risk is on the employer, not only for the funding, but also for the provision of that pension benefit. DC plans have a very different dynamic, and DC plan sponsors have – largely – seen little upside in signing on for a decision that they see as carrying with it a liability that extends well beyond the employment relationship. Indeed, there have been any number of real and perceived reasons to avoid doing so (see 5 Reasons Why More Plans Don’t Offer Retirement Income Options).

The SECURE Act attempts to resolve some of that resistance – creating a legislative “safe harbor” in place of the one articulated by the Labor Department in 2008 and expanded upon in a 2015 Field Assistance Bulletin. Arguably, a legislative safe harbor is “safer” than one staked out by regulators, but plan fiduciaries hoping to find a fiduciary “free pass” won’t find one here, despite the concerns expressed in the Times.

‘Financially Capable’

The legislation states that a fiduciary is expected to engage “in an objective, thorough, and analytical search,” and that they must consider the financial capability of the insurer to satisfy its obligations, consider the cost (including fees and commissions) of the guaranteed income contract “in relation to the benefits and product features of the contract and administrative services to be provided under such contract,” and determine “at the time of the selection, the insurer is financially capable of satisfying its obligations under the guaranteed retirement income contract…”.

Now, unlike the regulatory safe harbor, the SECURE Act outlines some pretty specific criteria as to what would satisfy the financial capability tests, specifically that the fiduciary gets written confirmation from the insurer that they:

• are licensed to offer such products; 
• have operated under a certificate of authority from their state insurance commission at the time of selection, and for the immediately preceding seven years; 
• have filed audited financial statements in accordance with the laws of that state; 
• maintain reserves that satisfies those state requirements;
• have undergone, at least every five years, a financial examination (in accordance with those state requirements); and
• that they will “notify the fiduciary of any change in circumstances occurring after the provision of the representations” detailed above that “would preclude the insurer from making such representations at the time of issuance” of the contract. 

The SECURE Act goes on to clarify that while fees are a consideration, there is no requirement to select the lowest cost, and that the fiduciary may consider the value of the contract, including features and benefits and attributes of the insurer. It also states that the fiduciary will be deemed to have conducted the required “periodic” review if they receive the written representations from the insurer on an annual basis, unless they receive a contrary notice, or are aware of “facts that would cause the fiduciary to question such representations.”

Limit ‘Ed’

If all of those conditions are met, the SECURE Act goes on to limit the liability of the fiduciary 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.”

While the fiduciary obligations to review and evaluate the insurer resonate with ERISA’s fiduciary admonitions, the concerns raised in the Times article seem to be twofold: that the mere existence of this new safe harbor will be touted as the free pass it most surely isn’t – and that the relative specificity of the conditions deemed to satisfy the financial capability test will result in a mere checkbox review – and that the checkbox – basically doing business in a state (and let’s remember that various states have varying requirements) while avoiding running afoul of those same state regulators – will serve as a back door for the annuity pitching “foxes” to enter the 401(k) “hen house” and those participant accounts to which they have long effectively been denied access.

Now, if in fact those results do flow from the SECURE Act’s implementation (and its integration with the Senate’s Retirement Enhancement and Savings Act (RESA)), there would be cause for concern. Certainly SECURE’s lifetime income provider fiduciary safe harbor is a more secure mooring for plan fiduciaries than the current landscape, if only because it provides some structure for the assessment of the financial capability of the product provider. That said, you could hardly be faulted, however it’s ultimately pitched, for not seeing a ton of daylight between that new safe harbor and the current fiduciary landscape. And the legislation, to my eyes, anyway, minces no words in reminding plan fiduciaries of the existing obligations under ERISA to assess, monitor, and review the conditions underlying the suitability of the lifetime income option as a prudent plan investment.  

Unless, of course, you’re reading the Times (instead of the actual legislation) – and you are concerned enough at the potential abuse that you’d consider withholding your support for the legislation, legislation it’s worth remembering passed the House by the kind of margin generally reserved for the naming of post offices.

Now, what the Times article gives voice to is a seed of distrust – viewing the safe harbor language not as a relatively modest means to encourage consideration of an option that experts have long said was needed, for which participants routinely express interest (in surveys, if not actual take-up rates), but that plan fiduciaries have nonetheless been reluctant to embrace.  

When all is said and done, this safe harbor may not be “enough” – but it is a step, and fear-mongering notwithstanding – it is arguably a step along a path to a retirement that is, indeed, more secure.

- Nevin E. Adams, JD
 
See also: Retirement Plans and Retirement Income: It’s Complicated.

'Puzzle' Pieces

Academics have long agonized over something they call the annuitization puzzle.

Simply stated, the thing academics can’t quite understand is the reluctance of American workers to embrace annuities as a distribution option for their retirement savings. Some of that is because they assume workers are “rational” when it comes to complex financial decisions, specifically because “rational choice theory” suggests that at the onset of retirement, individuals will be drawn to annuities because they provide a steady stream of income and address the risk of outliving their income.

Compounding, if not contributing to that belief, are surveys – albeit surveys generally published, if not conducted by, annuity providers (or supporters) that consistently find support from participants for the notion of reporting benefits as a monthly payout sum, if not the notion of providing a retirement income option. And yet, despite those assertions, in the “real” world where participants actually have the option to choose between lump sums and annuity payments, they pretty consistently choose the former.

That said, a study by the non-partisan Employee Benefit Research Institute (EBRI) also supports the notion that plan design matters, and matters to a large extent, in those annuitization decisions.

Over the years, a number of explanations have been put forth to explain this reluctance: the fear of losing control of finances; a desire to leave something to heirs; discomfort with entrusting so much to a single insurer; concern about fees; the difficulty of understanding a complex financial product; or simple risk aversion. All have been studied, acknowledged and, in many cases, addressed, both in education and in product design, with little impact on take-up rates.

Yet today the annuity “puzzle” remains largely unsolved. And, amid growing concerns  about workers outliving their retirement savings, a key question – both as a matter of national retirement policy and understanding the potential role of plan design and education in influencing individual decision-making – is how many retiring workers actually choose to take a stream of lifetime income, versus opting for a lump sum.

‘Avail’ Ability

Some of that surely can be attributed to the lack of availability. Even today, industry surveys indicate that only about half of defined contribution plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. Indeed, I’ve never met a plan sponsor who felt that the official guidance on offering in-plan retirement income options was “enough.”

Enter the bipartisan Retirement Enhancement and Security Act (RESA), which includes a provision to require lifetime disclosures – and while its prospects seem bright, it remains only a prospect. Closer to a current reality is Tax Reform 2.0, but the retirement component of the legislation approved by the House Ways and Means Committee on Sept. 13 did not address the subject – or at least didn’t until the Chairman Kevin Brady introduced a Managers’ Amendment that largely, if not completely, mirrors RESA’s.

That 8-page addition outlines a “fiduciary safe harbor” for the selection of a lifetime income provider, which, as its name suggests, binds the liability to a consideration “at the time of the selection” that the insurer is financially capable of satisfying its obligations under the guaranteed retirement income contract. It also clarifies that there is no requirement to select the lowest cost contract, and that a fiduciary “may consider the value of a contract, including features and benefits of the contract and attributes of the insurer” in making its determination. Moreover, there is language that notes that “nothing in the preceding sentence shall be construed to require the fiduciary to review the appropriateness of a selection after the purchase of a contract for a participant or beneficiary.”

At this point, it’s impossible to say whether this legislation will be signed into law, much less whether it will prove sufficient to assuage the concerns that have continued to give most plan sponsors pause in adopting this feature.

A couple of things seem clear, however. First, as long as plan fiduciaries continue to feel vulnerable to a generation of potential liability for provider selection beyond the initial selection, they aren’t likely to provide the option.

And participants who are not given a lifetime income choice as a distribution option will surely not (be able to) take it.

- Nevin E. Adams, JD 

See 5 Reasons Why More Plans Don’t Offer Retirement Income Options

7 Reasons Retirement Income Solutions Stall

A recent report suggests that participants are “clueless” about decumulation. And who can blame them?

Actually, the issue is perhaps more basic than a decumulation strategy. The report – by Cerulli Associates – based that conclusion on a survey that merely asked 401(k) investors who were at least 45 what they planned to do with those savings when they retired. In response, a quarter said they didn’t know, and another quarter said they planned to consult with an advisor – an alternative that Cerulli characterized as “a marginally more prepared version” of the same response.

I’ve long noted that while workers love pensions, they hate (or are at least ambivalent about) annuities – and while there’s a bit of hyperbole there, at least as things stand today, writ large, plan sponsors still seem to be keeping retirement income options at arm’s length – and by that I mean outside the plan’s distribution options. Participant interest and takeup is even less enthusiastic – which only serves to affirm the plan sponsor reluctance.

The provider community is nonplussed, and no wonder. There are plenty of surveys out there suggesting that participants want lifetime income options (though, let’s face it, many of those are sponsored or conducted by providers of those options), no shortage of academic studies that suggest participants would benefit from their availability (if not their mandate), the occasional legislative proposal to expand and/or mandate them as a distribution default, and even ongoing, if modest, support from regulators who also clearly favor the option.

And yet the reality is that when actually given the choice (and in fairness, most DC plans don’t offer anything remotely resembling a true retirement income option), the vast majority of participants don’t avail themselves of the option. Even those in defined benefit plans seem inclined to “take the money and run” given the chance.

Here are some thoughts on why – and what might have to change.

They don’t know how much they’ll need.

For more than 25 years, the nonpartisan Employee Benefit Research Institute (EBRI) has, in its Retirement Confidence Survey, chronicled just how few individuals have even hazarded a guess as to how much income they will need in retirement.

Let’s face it, if you don’t know how much you’ll need, it’s pretty hard to get comfortable that the amount you’re quoted as a monthly payment amount will be “enough.”

They don’t know how much they can get from what they have saved.

Back in May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance.

That proposed rulemaking hasn’t gone any further, although a number of recordkeepers have undertaken to provide an estimate on statements based on certain assumptions. What that means today is that some participants at least have the opportunity to get at least a rough approximation of what their current balance might produce in terms of monthly income. Some have gone so far as to project what that might look like at retirement age.

But that’s not all participants, or all plans – and it’s generally limited to a projection based on the balance on that particular recordkeeper’s platform. And for some at least, it’s perhaps a disquieting number.¹

They’re afraid they’ll lose out.

Perhaps the most common aversion workers have to committing to retirement income is the pervasive sense that they’ll hand over this big lump sum – which is for many, the most money they have seen in their lives, a sum they may have spent their whole career accumulating – to some large insurance company, and then run out of life before they get (all) their money “back.”

Though the alternative – running out of money before you run out of life – is surely no less disconcerting.

There are some “reframing” alternatives to this behavioral finance impediment – things like allowing workers to buy into the annuity over time, rather than all at once, and studies have suggested that a consumption framework (rather than a focus on investments and return) might have an impact.

They’re afraid that the annuity provider will go out of business.

The annuity industry is quick to point out that this has never happened, that the industry has a robust state oversight structure, and that in the unlikely event that at some point in the distant future, if the firm you’ve chosen to do business with does fall upon hard times, there’s a good chance that other firms would, as part of a managed reorganization, pick up the pieces (including your monthly payment).

They feel like it’s “all or nothing.”

For participants, the annuity decision has traditionally been presented as either/or; either take a lump sum, or take that lump sum in the form of an annuity. Enter Qualified Longevity Annuity Contracts, or QLACs.

Though widely touted as a viable alternative by regulators, the take-up rate on the alternative to “all or nothing” appears to be largely in the latter category. Arguably, the lack of availability in workplace retirement plans isn’t helping any – and for some, if trying to figure out the “right” answer for a monthly payment can be complicated, figuring out how much to do as a partial solution is likely to be almost as much of a problem.

It’s (really) complicated.

The good news is, there are a lot of options when it comes to buying an annuity. The bad news is, there are a lot of options when it comes to buying an annuity.

There’s little question that participants need help structuring their income in retirement – and little doubt that a lifetime income option could help them do that. That said, the biggest impediment to adoption may simply be that (industry surveys notwithstanding) participants don’t seem to be asking for the option. And when they do have access, most don’t take advantage. Even when DB plan participants have a choice, they opt for the lump sum.

Not that those dynamics can’t be influenced by plan design or advisor input, but justifiable concerns remain about fees, portability and provider sustainability. Moreover, there are significant behavioral finance impediments, be it the overweighting of small probabilities, mental accounting – or simply the fear of losing control of finances, a desire to leave something to heirs, or simple risk aversion. It’s often not just one thing. It’s… complicated.

They don’t know how to find help.

As an industry, we bemoan worker inattentiveness to the sufficiency of their retirement savings accumulations – and that’s with the aid and assistance of workplace retirement savings education, defaults for decisions like contribution amount and investments, and increasingly the availability of a retirement plan advisor.

Let’s face it: When it comes to making a decision about a lifetime income option, or even evaluating the option, most workers are – still – literally on their own.

- Nevin E. Adams, JD
 
Footnote

1.  While the so-called “common wisdom” might be that participants might be put off by the small numbers, in its 2014 Retirement Confidence Survey, EBRI found that, presented with a projection based on their balances and assumptions similar to those proposed by the Labor Department at the time, more than half (58%) thought that the illustrated monthly income was in line with their expectations. ↩

Retirement Plans and Retirement Income: It’s Complicated

One of the great concerns of our industry — when we aren’t worrying if people have saved enough for retirement — is worrying about how those savings are going to last through retirement.

Enter to that debate a recent report from the Government Accountability Office (GAO) that basically takes the Labor Department to task for not doing enough to encourage the use of lifetime income options in workplace retirement plans.

Sure enough, it’s been hard for lifetime income options to get traction with retirement plans. The GAO rightly outlines a number of the concerns typically articulated with these options — which are well known to those who have looked to remedy the situation (see “5 Reasons Why More Plans Don’t Offer Retirement Income Options”).

GAO Alternatives

So, what suggestions does the GAO have for the DOL? Well, the GAO has several specific suggestions, including that the DOL:

• do more to clarify the safe harbor for selecting an annuity provider;
• consider providing legal relief for plan fiduciaries offering an appropriate mix of annuity and withdrawal options;
• help encourage the use by incorporating references to selecting a lifetime income/annuity provider in both its current publications, or by issuing new guidance to do so;
• include participant access to advice on the plan’s lifetime income options from an expert in retirement income strategies; and
• consider providing required minimum distribution (RMD)-based default income plan distributions as a default stream of lifetime income based on the RMD methodology beginning, unless they opt out, when retirement-age participants separate from employment, rather than after age 70½.

The GAO goes so far as to suggest that the Labor Department encourage plan sponsors to use a record keeper that includes annuities from multiple providers on their record keeping platform (as if one wasn’t complicated enough), to encourage them to offer participants the option to partially annuitize their account balance, and to take into account changing providers that could put the current lifetime income products at risk.

The Logic

The thinking, of course, is that if you made it (feel) safer for plan sponsors to offer lifetime income options, more would do so. And that if you had more plan sponsors offering the options, more participants would have a chance to, and ultimately would, choose them. And that if you set up those options as a default, even more participants would “choose” them, or at least wind up with them. It’s hard to rationally argue with that logic. And yet, for years I’ve watched a number of truly innovative and objection-responsive solutions come to market — and, for the most part, fail to live up to expectations. Why? Well, it’s complicated.

Consider that, unlike automatic enrollment — around which the Pension Protection Act so carefully crafted provisions that provided an exit path for participants who had second thoughts — unwinding lifetime income options is generally seen as more… complicated. Not impossible, mind you — but “complicated.”

As for the enhancements to the current safe harbor that GAO recommends — well, if plan sponsors are to be believed, that would certainly help. But let’s not ignore the reality that the DOL has already taken some pretty significant steps in that direction (and seems reluctant to go further). Despite those steps, I think it’s fair to say that plan fiduciaries still find it their responsibilities with regard to those options… complicated, certainly compared to the other providers/services for which they are accountable.

Behavioral Barriers

There’s little question that participants need help structuring their income in retirement — and little doubt that a lifetime income option could help them do that. That said, the biggest impediment to adoption may simply be that (industry surveys notwithstanding) participants don’t seem to be asking for the option — and when they do have access, mostly don’t take advantage, even when defined participants have a choice, they opt for the lump sum. Not that those dynamics can’t be influenced by plan design or advisor input, but justifiable concerns remain about fees, portability and provider sustainability. Moreover, there are significant behavioral finance impediments — be it the overweighting of small probabilities, or mental accounting — or simply the fear of losing control of finances, a desire to leave something to heirs, or simple risk aversion. It’s often not just one thing. It’s… complicated.

Ultimately, while the GAO’s recommendations would surely expand the availability of these options, would it have an impact on participant adoption? An income option with all the features participants want will be even more complex (and expensive) — and, if there were to be a default withdrawal option into a lifetime income option, I suspect that the opt-out rates would be high, for (all) the reasons noted above.

Why? Well, because it’s (still) complicated.

- Nevin E. Adams, JD

5 Reasons Why More Plans Don’t Offer Retirement Income Options

A frequent commentary on today’s plan designs is that they are more focused on accumulation than the eventual spend-down of those savings.

It’s said that defined contribution plans too often not only facilitate lump-sum distributions, but, in design at least, encourage them. And yet, despite a growing awareness of the importance of retirement income planning,PLANSPONSOR’s 2014 DC Survey finds that nearly half of plan sponsors offer no income-oriented products to their participants.

Here’s five reasons plan sponsors give for not offering retirement income options.

1. There is no legal requirement to provide a lifetime income option.

Let’s face it, it’s a full-time job just keeping up with the plan provisions, standards, participant notices and nondiscrimination tests that are required by law. The notion that a plan sponsor would, in the absence of a compelling motivation take on extra work, and work that carries with it additional financial and fiduciary responsibility as well, doesn’t seem very realistic.

That said, plan sponsors — particularly larger plan sponsors — take on plenty of other plan design changes that aren’t forced on them, most notably the automatic enrollment designs outlined in the Pension Protection Act of 2006.

However, with no obligation to provide this offering, and an underlying concern that providing the option does involve taking on additional liability.

2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”

I’ve never met a plan sponsor who felt that the guidance on offering in-plan retirement income options was “enough.”

I’m not saying they’re not out there – clearly there are in-plan options available in the marketplace now, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. That said, industry surveys indicate that only about half of defined contribution plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s following the 2008 safe harbor regulation from the Labor Department regarding the selection of annuity providers under defined contribution plans.

That said, earlier this year, the Labor Department in Field Assistance Bulletin (FAB) 2015-02, acknowledged that they had heard those concerns, and offered some insights on how to “reconcile the ‘time of selection’ standard in the safe harbor Rule — which embodies the general principle that the prudence of a fiduciary decision is evaluated under ERISA based on the information available at the time the decision was made — with ERISA’s duty to monitor and review certain fiduciary decisions.”

Part of this additional clarity was the point that the plan fiduciary among other things appropriately concludes that, at the time of the selection [emphasis added in the DOL’s FAB], the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided. “At the time of the selection” is further defined as the time that the annuity provider and contract are selected for distribution of benefits to a specific participant or beneficiary; or the time that the annuity provider is selected to provide annuities as a distribution option for participants or beneficiaries to choose at future dates.

I’m not saying that is “enough” — but clearly the Labor Department is listening, and trying to close that comfort gap. And if you haven’t yet read FAB 2015-02, you should.

3. Operational and cost concerns linger.

While several industry providers have offered what seem to be workable, effective solutions to the “portability problem,” plan sponsors remain concerned that the cost and complexity of transitioning these offerings — either by individual plan participants, or the plan itself — would be daunting, at best.

4. Participants don’t take advantage of the option when offered.

The so-called “take up” rates among participants can be sliced in different ways — by provider (the options are varied, after all), by participant age, even by the involvement of the employer in positioning in the option — but however you parse it, the word I’ve generally heard to describe participant adoption rates is… ”disappointing.”

Now, that kind of response hasn’t stopped plans from putting in options like self-directed brokerage accounts (SBDAs) over the years (on the other hand, the participants who were embracing SDBAs tended to be fairly influential voices).

And there is evidence that even defined benefit plan participants, given the choice between taking a lump sum or an annuity, often go for the former. That said, a study by the non-partisan Employee Benefit Research Institute (EBRI) also supports the notion that plan design matters, and matters to a large extent, a large extent, drives annuitization decisions.

5. Participants aren’t asking for it.

Once you’ve walked through all the objections to in-plan retirement income options, it all seems to come down to this. Despite industry surveys that suggest worker interest in the concept (if not the reality) of retirement income solutions, it never seems to get to the level of expressing that interest to those who actually make retirement plan design decisions.

Plan design can surely help steer participants toward these options, but most advisors I’ve spoken with say that, for a variety of reasons (cost, complexity) these retirement income options are still sold, and not bought.

Sure, most plan sponsors acknowledge that participants (certainly older, longer-tenured participants) could use the kind of help that a retirement income structure could provide, and yes, plan sponsors are looking for a more secure safe harbor, and they’d certainly welcome a PPA-ish “nudge” in that direction.

But until it becomes an articulated concern for the workers they hope to attract, retain and eventually retire from their workforce, it’s likely that the adoption rate — by plans and plan participants — will be slower than might be hoped.

- Nevin E. Adams, JD

“Drawing” Board?

While drawing boards have been used by engineers and architects for more than two centuries, the phrase “back to the drawing board” is of much more recent origin, coined by the Peter Arno in a cartoon first published in the March 1, 1941 issue of New Yorker magazine.(1) The cartoon features a crashed plane in the background, a parachute in the distance, several military officials and rescue workers rushing to help/investigate—and one remarkably nonchalant individual, walking in the opposite direction with a rolled up document tucked under his arm as he comments, “Well, back to the old drawing board.”

For all the much-deserved focus on retirement savings accumulations, a growing amount of attention is now directed to how those already in (and fast-approaching) retirement are actually investing and drawing down those savings.

A recent EBRI analysis(2) found that at age 61, only 22.2 percent of households with an individual retirement account (IRA) took a withdrawal from that account. That pace slowly increases to 40.5 percent by age 69 before jumping to 54.1 percent at age 70, and by the age of 79, almost 85 percent of households with an IRA took a distribution.

IRAs are, of course, a vital component of U.S. retirement savings, holding more than 25 percent of all retirement assets in the nation, according a recent EBRI report. A substantial and growing portion of these IRA assets originated in other employment-based tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans.

The EBRI analysis also found that the percentage of households with an IRA making a withdrawal from that account not only increased with age, but also spiked around ages 70 and 71, a trend that appears to be a direct result of the required minimum distribution (RMD) rules in the Internal Revenue Code.(3) Those rules require that traditional IRA account holders begin to take at least a specific amount from their IRA no later than April 1 of the year following the year in which they reach age 70-½, or else suffer a fairly harsh tax penalty.

In fact, at age 71, 71.1 percent of households owning an IRA that took a withdrawal reported that they took only the RMD amount, increasing to 77.4 percent at age 75, 83.2 percent at age 80, and 91.1 percent by age 86.

However, the EBRI report noted that IRA-owning households not yet subject to the RMD—those headed by individuals between the ages of 61 and 70—made larger withdrawals than older households, both in absolute dollar amounts as well as a percentage of IRA account balance. Indeed, the bottom-income quartile of this age group had a very high percentage (48 percent) of households that made an IRA withdrawal—and their average annual percentage of account balance withdrawn (17.4 percent) was higher than the rest of the income distribution. Moreover, those younger households that made IRA withdrawals spent most of it.

While a significant percentage of those in the sample are drawing out only what the law mandates, the data indicate that more of those in the lower-income groups not only draw money out sooner, but also draw out a higher percentage of their savings—perhaps too early to sustain them throughout retirement.(4)

Planning and preparation matters—not only for retirement savings, but in retirement withdrawals. Because for those whose retirement resources run short too soon, it’s generally also too late to go “back to the drawing board.”

Nevin E. Adams, JD

(1) You can see the original cartoon online here.

(2) The data for this study come from the University of Michigan’s Health and Retirement Study (HRS), which is sponsored by the National Institute on Aging. See “IRA Withdrawals: How Much, When, and Other Saving Behavior,” online here.

(3) As noted in a previous post (see “Means Tested”), there are advantages to a drawdown strategy based on the schedule provided by the Internal Revenue Service (IRS) for required minimum distributions, or RMDs. See also Withdrawal “Symptoms.”

(4) The EBRI Retirement Readiness Ratings™ indicate that approximately 44 percent of the Baby Boomer and Gen-Xer households are simulated to be at-risk of running short of money in retirement, assuming they retire at age 65 and retain any net housing equity in retirement until other financial resources are depleted. Those individuals may well become part of the significant percentage of retirees who eventually must depend on Social Security for all of their retirement income. See “All or Nothing? An Expanded Perspective on Retirement Readiness.”

Picture Puzzle

One of my favorite memories of visiting my grandparents over the holidays was working on jigsaw puzzles. These were generally large, complicated affairs—whose construction was spread over days, as various family members would stop by to work on a section, to build on a border, or sometimes contribute a single piece they would spot as they drifted by on their way to another activity. Perched in a prominent place throughout would be the puzzle lid with that all-important picture of what we were working toward to help keep all those individual, and sometimes fleeting, efforts in the proper perspective, that made it possible to differentiate the blue of what would appear to be sky from what would turn out to be an important, but obscure section of mountain stream.

In retirement plans, one of the more intransigent concerns for policy makers, providers, and plan sponsors alike is what has been called the “annuity puzzle”—the reluctance of American workers to embrace annuities as a distribution option for their retirement savings. What economists call “rational choice theory”(1) suggests that at the onset of retirement individuals will be drawn to annuities, because they provide a steady stream of income, and address the risk of outliving their income. And yet, given a choice, the vast majority don’t.

Over the years, a number of explanations have been put forth to try and explain this reluctance: the fear of losing control of finances; a desire to leave something to heirs; discomfort with entrusting so much to a single insurer;, concern about fees; the difficulty of understanding a complex financial product; or simple risk aversion—all have been studied, acknowledged, and, in many cases, addressed, both in education and in product design, with little impact on take-up rates.

As defined contribution programs have grown, those frustrated with the tepid rate of annuity adoption have sought to bring employers into the mix by providing them (and the plans they sponsor) with a range of alternatives: so-called “in- plan” retirement income options, qualified default investment alternatives that incorporate retirement income guarantees, and expanded access to annuities as part of a distribution platform. In recent years, regulators have also entered the mix, among other things issuing a Request for Information (RFI) regarding the “desirability and availability of lifetime income alternatives in retirement plans,” conducting a two-day hearing on the topic, and (as recently as last year) issuing both final and proposed regulatory guidance.

Yet today the annuity “puzzle” remains largely unsolved. And, amidst growing concerns about workers outliving their retirement savings, a key question—both as a matter of national retirement policy and understanding the potential role of plan design and education in influencing individual decision-making—is how many retiring workers actually choose to take a stream of lifetime income, vs. opting for a lump sum.

As outlined in a new EBRI Issue Brief,(2) the evidence on annuitization in workplace pension plans has been mixed. But the EBRI report provides an important new perspective to a 2011 paper titled “Annuitization Puzzles” by Shlomo Benartzi, Alessandro Previtero, and Richard H. Thaler.(3) In that paper, they analyzed 112 different DB plans provided by a large plan administrator and, focusing on those who retired between ages 50 and 75 with at least five years of job tenure and a minimum account balance of $5,000, and noted that “…virtually half of the participants (49 percent) selected annuities over the lump sum,” further observing that “When an annuity is a readily available option, many participants who have non-trivial account balances choose it.”

The study’s authors went on state that “The notion that consumers are simply not interested in annuities is clearly false,” explaining that “…the common view that there is little demand for annuities even in defined benefit plans is largely driven by looking at the overall population of participants, including young and terminated employees and others with small account balances who are either required to take a lump-sum distribution or simply decide to take the money.”

Mixed Behaviors?

In essence, Benartzi’s “Annuitization Puzzles” study says that much of the existing research draws inaccurate conclusions by mixing the behaviors of younger workers with smaller balances with those who might, based on their age and financial status, be expected to choose an annuity. However, as noted in the EBRI Issue Brief, that study failed to take into consideration what has long been known to be a key element in retirement plan behaviors: retirement plan design. In effect, the Benartzi study blends the behaviors of participants who have the ability to choose an annuity with those who have either no choice, or one restricted by their plan.

What kind of difference might this make? Well, taking into account the same types of filter on tenure, balance, and age employed by the Benartzi study, as well as a series of plan design restrictions, EBRI found that for traditional defined benefit plans(4) that imposed no restriction on doing so, fewer than a third of those with balances greater than $25,000 opted for an annuity, as did only about 1 in 5 whose balances were between $10,000 and $25,000. Those with balances between $5,000 and $10,000 were even less likely to do so.(5) In sum, even filtering to focus on the behaviors of individuals seen as most likely to choose an annuity distribution, we found that, given an unfettered choice, the vast majority do not.

Ultimately, the EBRI analysis shows that, to a large extent, plan design drives annuitization decisions.(6) We know that plan design changes have been successful in influencing participant behavior in DC plans via auto-enrollment and auto-escalation, and the new EBRI study suggests that plan design can also play a critical role in influencing distribution choices.

It also shows the importance of taking into account the whole picture when you’re trying to solve a puzzle.

Nevin E. Adams, JD


(1) “Annuitization Puzzles,” by Shlomo Benartzi, Alessandro Previtero and Richard H. Thaler is online here.

(2) According to Investopedia, it is “…an economic principle that assumes that individuals always make prudent and logical decisions that provide them with the greatest benefit or satisfaction and that are in their highest self-interest.”

(3) See the January 2013 EBRI Issue Brief, no. 381, “Annuity and Lump-Sum Decisions in Defined Benefit Plans: The Role of Plan Rules,” online here.

(4) Participants in cash balance plans were even less likely to choose annuities than those in “traditional” final-average-pay defined benefit plans.

(5) The Benartzi study filtered only on individuals with a balance greater than $5,000.

(6) The EBRI analysis also found that annuitization rates increase steadily with account balance for older workers (but not for younger workers), and that annuitization rates also increase with tenure. See “Annuity and Lump-Sum Decisions in Defined Benefit Plans: The Role of Plan Rules,” online here.

Halfway, Honed

Last week we published¹ the results of an update of EBRI’s Retirement Readiness Rating from the Retirement Security Projection Model® (RSPM). That model, which has been modified over the years to take into account certain structural and market changes,² projects that more than half (56 percent) of Boomers and Gen Xers will be able to retire with enough money to cover the cost of basic retirement needs as well as uninsured health care costs, including stochastic expenses from nursing home and home health care.³

On the other hand, that same model projects that about 44 percent won’t have “enough” to cover those expenses.

It’s worth noting that the trends are positive. Even after the toll of the 2008 financial crisis, the 2012 number of those at risk of running short is some 5−8 percentage points “better” than what was found in 2003. Moreover, the analysis is able to point to some important trends; eligibility for a workplace retirement plan remains a significant factor in reducing the risk of running short⁴, while the more recent broad-based advent of automatic enrollment plan designs makes it ever more likely that those eligible to participate—particularly lower-income workers—do so.

The research does point out that lower-income households are much more likely to be at risk for insufficient retirement income,⁵ even though basic retirement expenses are modeled as a function of the household’s expected retirement income. In fact, the 2012 baseline ratings for Early Boomers range from a projection that 87 percent of the simulated lifepaths for the lowest-income households are at risk in retirement to only 13 percent of retired highest-income households.

Obviously, the reality of more than 4 in 10 Americans not having sufficient post-retirement wealth is of concern, though I find that many are pleasantly surprised at how high a percentage is expected to have sufficient assets. Indeed, whether one draws comfort from that finding likely depends on your expectations (and perhaps on which side of that line you think you might find yourself post-retirement).

Regardless of those expectations—and whether you find the picture to be one of a glass half full or half empty—the data give us all something to work with, and to work toward.

- Nevin E. Adams, JD

¹ EBRI Notes May 2012, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,®” online here. http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=5062

² The Retirement Security Projection Model® (RSPM) was developed in 2003, and in 2010 it was updated it to incorporate several significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans and the recent crises in the financial and housing markets. EBRI has recently updated RSPM for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010.

A household’s simulated lifepath in retirement is considered to be at risk in the baseline version of the model if its aggregate resources in retirement are not sufficient to meet aggregate minimum retirement expenditures, defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income) as well as some health insurance and out‐of‐pocket health‐related expenses, plus stochastic expenses from nursing home and home health care (at least until the point such expenses are picked up by Medicaid). The resources in retirement are assumed to consist of Social Security (status quo benefits for the baseline version of the simulation); account balances from defined contribution plans; individual retirement accounts (IRAs) and/or cash balance plans; annuities or lump-sum distributions from defined benefit plans; and net housing equity (in the form of a lump‐sum distribution at the point that other financial resources are exhausted). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for replacement rates and other thresholds.

⁴ For an idea of just much of an impact plan eligibility makes, consider that, according to the simulation results, Gen Xers with no future years of eligibility would run short of money in retirement 60.7 percent of the time, whereas fewer than 1 in 5 (18.2 percent) of those with 20 or more years of future eligibility would run this risk.

⁵ In addition to underlining the importance of automatic enrollment for the lowest income, this also underlines the importance of Social Security as a post-retirement income source for this group.

Pension Penchants

On Dec. 8, the Pension Benefit Guaranty Corporation (PBGC) convened a forum on “the Future of Pensions.”

The forum was structured around two separate panels of experts (including EBRI President and CEO Dallas Salisbury) who spoke to an audience of pension industry thought leaders on the current retirement landscape, as well as potential enhancements and solutions.

Among the insights/observations shared in the session:

• In 1975, among those over age 65, 23 percent had pension/annuity income; in 2010, that had risen to 33 percent.


• According to EBRI’s Retirement Readiness Rating (RRR) 57 percent of those under age 65 were considered to be at risk of not having sufficient retirement resources to pay for “basic” retirement expenditures and uninsured health care costs, a figure that had declined to 45 percent in 2010.

• In fact, a world in which 30-year job tenure (and associated pension benefit) was never a reality for 80 percent of the nation’s workers. Rather, it was a myth that led “too many to do too little for too long,” leaving many with no retirement resources other than Social Security. Today, more Americans will retire at far more fiscally appropriate times, with more assets from which to draw.

• Financial insecurity looms large, but has increased consumer awareness of the situation, the need to prepare, and the possibility of scaling back retirement expectations.

• Today, about 18 percent of those over age 65 are still in the workforce; 10 years ago, just 11% were.

• People assume they will be able to work longer—but the data indicate they won’t be able to, for reasons outside their control.

• Regulation/legislation does impact/influence the decision by employers to offer workplace retirement plans.

• Employers are rational when it comes to offering benefits—and they consider both shareholder value and employees in their decision-making.

• Employees are also rational when it comes to making decisions; health care a more immediate concern for many than retirement.

• People make rational decisions, but they also tend to be inefficient about those decisions.

• Americans are far too optimistic—they assume that their pay will continue to increase, despite data that indicates that it plateaus for many in their mid-40s. They assume that they will save more later, but they don’t.

• National retirement plan participation rates of 50 percent include workers (part-timers, those under 21) that aren’t normally covered by these plans.

• Health care costs impact certainty/predictability of benefit programs and individual savings rates.

• It’s not how much you have at retirement, it’s how much you have at the end of retirement.

• Guaranteed returns are very expensive.

• The better we understand retirement risks, the better we’ll be able to mitigate them.

• Social Security offers universal defined benefit (DB) coverage—and offers a critical foundation for other retirement solutions to build on.

• If employers are going to take on the risk of offering a DB plan, there has to be some reward beyond just doing right by their retirees.

• Predictability is a key factor in employer decision-making on retirement plan designs.

• Regulations tend to be “one size fits all,” but employers are not, and vary greatly.

• “If you tell employers they can never take it out, they will never put it in.”

• Providing lifetime income in a low interest rate environment is very expensive.

• Employers care about retirement income—don’t drive them away from providing these programs.

• Investment risk, interest rate risk and longevity risk represent the major DB risks for employers. These risks are shifted to workers in the shift to defined contribution (DC) retirement plans, but the impact is very different. Investment risk and interest rate risk have an immediate impact on employer, but not on the individual saver. However, employers have the ability to pool (and thus mitigate) longevity risk—an option not available to individual savers.

- Nevin E. Adams, JD

Mixed Messages

We had wrapped up a very successful half-day adviser event ahead of our annual Awards for Excellence dinner last week. As we closed up the session, a co-worker of mine commented to me as an aside, “Nobody ever told me I needed to be saving 12% before.”

Now, this co-worker has nothing to do with our magazines, or the content that fills our Web sites and newsletters. He just happens to work at a company that, among other things, publishes information about retirement plans. He’s a participant in our benefit plans, of course—and so he has probably been exposed to all the same types of education and savings materials as anyone (perhaps more). He’s a smart guy (he’s pursuing his MBA at night), tech-savvy, and he pays attention. And yet, it wasn’t till he was effectively sitting there as a fly on the wall in a room full of the nation’s best retirement plan advisers that he overheard someone put forth a specific savings-target figure.

Now, like any good plan sponsor, I can explain that. I don’t know his individual financial circumstances (I’d have to “work” even to find out how much he’s saving at present), have no idea when he plans to retire, and can’t possibly guess at the viability of Social Security or other resources at that date. He may marry “well,” he may have a rich uncle—heck, he might even win the Lottery. I can tell you that his employer offers a solid 401(k) plan, with a robust investment menu (reviewed on a regular basis with our financial adviser), a generous match, access to both managed accounts and target-date funds, and the opportunity for him to sit down with a financial adviser (paid for by his employer, I might add) or get a consult via the phone, as well as through an assortment of Web-based tools. Looking over the plan’s structure, administration, and fees, it’s hard not to feel that (in the words of the Lone Ranger), “Our work here is done.”


Except, of course, it obviously isn’t.

Now, I don’t know that 12% is the right answer in his individual case. For all I know, that’s still not going to be “enough”—or, based on the combined results of the aforementioned individual circumstances yet to be discerned, it might be way too much. Obviously, there are many logistical impediments to us divining with precision what the “right” amount is for every individual situation (including our own).

That said, IMHO, any number of plan design features convey a different message to participants. A significant number of plans still don’t provide for an automatic (or even immediate) enrollment. Those who do generally default employees into these programs at a mere 3% of pay, which, in most plans, isn’t even enough to qualify for the full match. Many plans match those deferrals only up to 6% (or less), auto-accelerate at just 1% increments, and—if we’re rigidly adhering to the outline provided in the Pension Protection Act—probably cap those automatically accelerated deferrals at 10% of pay.

We all know that the motivations for those plan designs are nearly as varied as the plans that employ them: They represent the plan sponsor’s sense of a competitive benefit structure, they match the expectations of their current workforce, or perhaps they are simply what the employer can afford at any particular time. Yet, we all see evidence every day that participants read into these structures a kind of “code” that these are the “right” answers to provide them with a financially secure retirement, rather than representing decisions made for reasons that, while generally sound, are completely unrelated to ensuring individual retirement security.

We’ve long held off giving people a specific target for savings, for a host of real and legitimate reasons. I wonder if the time hasn’t come to put a target out there for participants—one that might not be precisely the “right” number for every individual situation, but one that will give them something to aim for, rather than continue to duck the issue and hope for the best.

It’s a message that I think participants are ready for—and there’s no time like the present.

—Nevin E. Adams, JD

“Money Back” Guarantees

We’re seeing a renewed focus on retirement income of late, and for good reason.

Most participants seem barely able (or willing) to deal with the most rudimentary decisions about saving, much less investing those savings; and while the industry has developed tools and approaches to better their odds, IMHO, those challenges pale before that of crafting a workable, widely accepted, and readily implemented retirement income solution.

Not that retirement income solutions don’t exist for participants. Setting aside the long-standing availability (and viability) of “traditional” annuities, over the past several years, a number of innovative solutions have been brought to market. Indeed, by my count, three more were introduced just last week.


Clearly the market for such offerings is large, and getting larger by the day—and yet, despite a great deal of time, energy, expense, and focus, well, let’s just say that plan sponsors (still) seem as confused by the variety of choices in that arena as they were (mostly) oblivious to the distinctions in target-date fund structures. And, quite frankly, they’re sceptical (if not downright cynical) in a way that they never were—but should have been, IMHO—about the ability of a fund complex to craft an investment allocation perfectly aligned with the needs of an individual’s retirement date.

Most trying to “solve” the retirement income problem presume that we already have a workable, viable product available—we need only figure out better ways to get participants into “it”. As a consequence, legislators (and some product providers) talk about things like “auto” annuitizing—the implementation of an annuity default for distributions to overcome resistance—while academics are inclined to focus on behavioral finance design modifications: better ways to “frame” or position the option, to “nudge” participants to make the “better” decision.

At its simplest, an annuity is nothing more than an investor handing over money (or a stream of money) to an entity that promises, at some point in the future, to return it to the investor, ostensibly with some kind of return, above and beyond whatever fees are taken. Consequently, at least in theory, a participant who has spent their working career saving for retirement should be able to take those savings and hand them to an entity that can return it over time as a retirement paycheck.

But that remains a big step of faith for most, particularly in the wake of the financial crisis. After all, who CAN, or should, you trust with that much money—literally your life’s savings?

Don’t get me wrong—I’m encouraged by the new product developments, the interest of regulators in helping lay out a better course, the suggestions and insights of the academic community in fostering better plan designs, and the willingness of plan sponsors to keep an open mind.

But ultimately, when it comes to spurring the widespread interest of participants, IMHO, the best product design will be one that offers them a “get your money back” guarantee (1).

—Nevin E. Adams, JD

(1) Editor’s Note: Let me attempt to stave off correspondence from the American Council of Life Insurers who, the last time I penned a column suggesting that participants might be a bit queasy about the notion of converting their savings into an annuity, wrote to assure me (and presumably all of us) that “The five trillion dollar life insurance industry, which alone can provide annuity contracts, remains a pillar of the nation’s financial system. While the effect of the nation’s economic downturn has been widespread, not one annuity owner has missed receiving annuity payments.”

“Forever” More?

Last week, the Treasury Department and Department of Labor held two days of joint hearings on the subject of retirement income (see Lifetime Income Hearing Witnesses Demand Fiduciary Shield).

There was discussion about the need for product design enhancement (though much of the focus seemed to be on better explaining what was already available); better (i.e. cheaper) pricing for the kinds of institutional purchases these plans might provide (though I’m hard-pressed to see how you get any kind of aggregation benefit in terms of product just because the buyers all work for the same employer); and the challenges of portability, both when a plan changes providers and a participant changes employers.

There was also talk about misunderstandings about annuities that no amount of communication or education seems able to dispel (my guess is the hearings won’t alter that dynamic, either), and there was concern about differences in gender-specific annuity tables (and, let’s be honest, gender-specific savings habits and longevity experiences). And, of course, there was a LOT of talk about things that would encourage employers to embrace these options as an integral element of their plan design. To my ears, those recommendations tended to fall into two basic themes: some kind of QDIA-like default safe harbor, and/or some kind of fiduciary safe harbor for annuity selection by the plan fiduciary.

IMHO, you can’t not address those concerns. While there are any number of operational impediments to incorporating a retirement-income option, I still find that the big challenge remains plan sponsors’ concern about being on the hook for a bad annuity provider choice—not today, or a year from now, or even 10 years from now, but forever. And while, as with investment advice, the Labor Department has tried to offer guidance in the interests of encouraging higher adoption rates, so far as I can tell, it hasn’t budged the needle at all.

I don’t fault the Labor Department for this; after all, there is a fine line between offering the level of protection that will actually change fiduciary behavior and just giving the store away. Clearly, the plan sponsor/fiduciary’s decision will have a significant impact not only on the choices available to, but the choices taken by, participants—and somebody knowledgeable needs to be accountable. That same rationale, though it’s often glossed over, is why the plan sponsor retains its customary level of prudent-expert responsibility for the choice of an investment advice provider, even if some protection is afforded them on the particulars of that advice; and why they are still on the hook for the prudent selection of a qualified default investment alternative (QDIA), even though they gain a great deal of protection from potential participant lawsuits so long as they comply with the safe harbor requirements.

That said, IMHO, there’s a world of difference between making a point-in-time choice of an advice or investment provider—a decision that can be monitored, reasonably readily benchmarked, and changed—and that involved in selecting a retirement-income option where the untangling can be considerably more “involved.”

It’s more than a little ironic that the very thing that makes it possible for those providers to offer those kinds of lifetime income guarantees also makes for a certain sense of irrevocability in the decision. Now, I realize that it doesn’t have to be irrevocable, certainly not in a forever sense (though there are generally financial penalties attendant with that decision). But that, I think, remains the real problem with annuity selection, not just for plan fiduciaries, but for plan participants as well. You not only have to weigh a lot of considerations that people generally aren’t comfortable weighing, you wind up making a call that seems like it not only has to be right for now, but “right” forever.

It is, quite simply, a decision that still seems perfectly suited to guarantee that no decision will be made for as long as it can possibly be postponed.

Ultimately, in fact, what we may need to help plan sponsors make these options more available is not a better way to help participants get into annuities—but a better way to help them get out.

—Nevin E. Adams, JD