Retirement Income, Defaults and Fiduciary Duty

 I will confess that I am (still) of a mixed mind on imbedding retirement income solutions in 401(k) plans — and a new whitepaper on the implications of the new Investment Selection rule has done little to assuage those concerns.

The Morningstar paper — aptly titled “Guaranteed Income in DC Plans: Evaluating Target-Date Funds with Built-In Annuities” — covers a lot of ground. That said, more than half the paper is background[i] — chronicling both the trend lines to date, as well as offering a readable description of the two primary types of retirement income options that have found their way into the target-date fund framework (and yes, they’re quite different!). Those trendlines have captured the attention (and doubtless recirculation) of the paper, particularly among proponents.

But the “meat” of the paper considers the implicatio
ns of applying the Labor Department’s “new” Investment Selection Rule (though its official label at present remains “Fiduciary Duties in Selecting Designated Investment Alternatives”), and its list of six factors fiduciaries are charged with applying in their consideration(s) of all participant-directed choices[ii] on their retirement plan menu — at least if they expect to benefit from the presumption of prudence the Labor Department proposes to invoke in what it at least calls a “safe” harbor.

Factors Focus

And while those six factors — fees, complexity, performance, benchmarking, liquidity, and valuation — are to be broadly applied under the proposal, much (most? All?) of the coverage and discussion to date has been about the application of the Labor Department’s proposal to private markets, cryptocurrency, and the like. That said, this paper thoughtfully reminds us that retirement income option(s) require careful consideration as well.

Not to blend the first two, but fees on these retirement income offerings are definitely “complicated.” They’re higher than the other components of the target-date fund — the question is, what is the commensurate value? Their addition to the target-date fund definitely also adds mechanical complexity, certainly at the participant level (presumably the default facilitates adoption, but at some point, the participant has to “deal” with the reality).

As for performance — well, as the paper acknowledges, “Evaluating these products’ performance requires accepting upfront that forecasting is hard.” Ditto benchmarking, for much the same consideration. “Participants receiving guaranteed income through a GLWB or income annuity are benefiting from something traditional performance comparisons do not capture,” according to the authors. “This is where the Department of Labor’s emphasis on meaningful benchmarks becomes especially challenging for these products.” 

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And then there’s liquidity and valuation — which are one thing at a plan level, and potentially something quite different at the participant level. Oh, and the authors add a seventh factor; financial strength and the insurer’s credit rating — which while the SECURE Act may well provide helpful guidance there, those factors certainly bear additional, thoughtful consideration — and I would argue particularly so in a default fund scenario.

Complicate ‘Ed’

The paper itself is undeniably positive[iii] in its assessment of the need for, and the opportunities with, these solutions. It not only reviews the growing number of target-date structures incorporating guaranteed income components, it also outlines the potential behavioral and longevity-risk benefits of annuities.

But in my reading, the analysis is far more “nuanced.” Indeed, much of the paper reads like a litany of unresolved complications:

• Different annuity structures behave very differently.
• Fees and guarantees can be difficult to evaluate.
• Liquidity tradeoffs remain significant.
• Portability remains a significant concern — people change jobs, plan sponsors change recordkeepers, recordkeepers get acquired, insurers merge, and rollovers are complicated enough already.
• Participant understanding is limited — to say the least. Much less the understanding of the plan fiduciaries (and advisors) considering these options.

Little wonder that current adoption remains fairly muted despite years of industry attention and encouragement.

Proponents would, and have of course, argued that defaulting participants into these structures merely applies the same behavioral-finance principles that helped positively drive participation and savings rates higher.

If these structures were a straightforward solution, adoption likely would have moved beyond niche implementation by now. Instead, the industry continues searching for a retirement-income framework that participants will understand, fiduciaries will accept, and recordkeeping systems can realistically support — or at least one that can be slipped into a target-date offering that has already passed those tests.

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And while it remains just a proposal at this point, the Morningstar analysis suggests that applying the Labor Department's proposed framework to retirement-income solutions may rightly prove to be more challenging than applying it to traditional investment options.

The challenge is that retirement-income products are not merely investments with different return characteristics; they are insurance structures layered into investment vehicles. That distinction may ultimately require a different fiduciary lens altogether.

And whether the required analysis produces better fiduciary decisions — or simply more complexity — remains to be seen.

• Nevin E. Adams, JD

 

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[i] In fairness, a full quarter of the 13-page paper is devoted to disclosures/disclaimers.

[ii] Lifetime income options were one of the categories of investment alternatives named in President Trump’s August 2025 Executive Order (even if most wouldn’t be inclined to include them in that category).

[iii] In one executive summary bullet, it’s noted that assets in target-date strategies that include an annuity component for lifetime income grew to $44 billion at the end of March 2026, up from $25 billion a year earlier. However, in a separate bullet it’s acknowledged that “so far, growth has been driven by two series: BlackRock LifePath Paycheck (USD 26 billion in assets at the end of March) and custom target-date AB Lifetime Income (USD 14 billion).” So, $40 billion of the $44 billion in just those two.

Things I Wish I’d Known (and Done) Before I Retired

  

It’s hard to believe that I’ve now been “retired” for three years. That said, there are some things that, in hindsight, I wish I had known and/or acted on sooner. And a couple that I actually did - but might easily have overlooked. 

Here they are:

Do More Roth — Sooner

I’ve long been a huge fan of Roth. It’s not hard to look at the federal government’s finances, the current tax brackets, and figure out that the rates aren’t likely to get any lower in the future.

And yes, for the last decade or so of work, I went all Roth, including catch-ups. In fairness, Roth wasn’t an option for most of my retirement savings career. Even so, in those first years, recordkeepers weren’t really ready — and I, like most of my generation, had by then been so thoroughly coached on the advantages of pre-tax accumulations — well, it was easy to shrug off Roth as one of those things of which only the wealthy could afford to benefit.

But — and particularly as I got closer to retirement — the question has always been, where will your income in retirement line up with those brackets? That said, the closer I got to retirement, the easier it was to make that determination — and even more fully appreciate the benefits of tax diversification, particularly as I look ahead to the implications of required minimum distributions (RMD), when taxes on all those previous years of pre-tax savings come due — with a vengeance.

So, if you haven’t been thinking about Roth — and those new catch-up contribution limits are a good opportunity — do so.

Set Up the Roth IRA Before the Rollover

This one still makes me shake my head.

A few months after retirement, I rolled those balances into an IRA: one for a Roth, another for the pre-tax accounts.

Only to “discover” that the five-year clock on the withdrawal of Roth account earnings without penalty starts with the date of the IRA account opening, NOT the date from my 401(k). This turns out not to be a hidden secret — but I never picked up on it.

Now, as it turns out, I won’t need to pull that money out before the five-year clock resets with the rollover Roth IRA. But I could have spared myself a bit of worry if I had opened that Roth IRA earlier — and THEN rolled over to that account after retirement.

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Lesson learned: Open the account early — even if you don’t think you’ll use it right away.

Future You will thank you.

Know That 1099 Income Is … Messy (and It All Counts)

I assumed income in retirement would be simpler (there’s surely less of it) than working-life income.

That assumption did not survive contact with my new status as a 1099 worker. The good news is that, post-retirement, I’ve had several amazing opportunities not only to continue contributing my writing and expertise, but also get paid for it.

The bad news is, I wasn’t really prepared for the financial challenges of estimated tax payments, and, more critically, the financial toll of self-employment tax, wherein I am — even as a Social Security recipient — expected to pay both the employer and employee portions of FICA withholding. From a practical standpoint, that means that that “extra” income — well, less of it goes into my pocket than one might think.

Without withholding, income timing becomes trickier. Estimated tax payments become real (and, oh so large). Cash flow planning requires more attention. And there’s a persistent, low-grade constant uncertainty about whether I’m underpaying, overpaying, or just guessing until April rolls around. Oh, and the IRS has some pretty specific rules around how much estimated tax is due — and when.

And yes, there are financial penalties for guessing “wrong”.

The More You “Make,” the More They’ll “Take”…in Unexpected Ways

I have previously written about the biggest surprise of my retirement[i] — and I continue to struggle with it.

Like most people (I assume), I never gave much thought to post-retirement healthcare insurance. Oh, I’m aware of the funding issues (it’s actually in a more financially precarious position than Social Security), but as post-retirement healthcare has pretty much evaporated in the private sector, I figured we’d deal with it …when we had to.

Turns out, Medicare health insurance premiums are based on income. And if you’ve filed jointly, BOTH of your premiums are based on your adjusted gross income (AGI). Which means that 1099 income counts, and most particularly those withdrawals of pre-tax savings count. Big time.

Together, they can quietly push you into higher income-related premium tiers for Medicare — increasing Part B and Part D premiums in ways that feel disconnected from the original retirement planning conversation …but absolutely aren’t. That’s where those Roth decisions can really pay off.

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The interaction is subtle, but the dollars aren’t.

File for Medicare Before You Need It

Once you start receiving Social Security benefits, you are automatically enrolled in Medicare Part A. But even if you work past age 65 (as I did) and don’t start taking Social Security (like me), you still have to sign up for Medicare — even if you’re still working, have insurance, and don’t plan to use Medicare (this will, of course, confuse your current health care providers, at least momentarily. Everyone assumes when you turn 65, you’re on Medicare). 

There’s a seven-month initial enrollment period that begins three months before the month you turn 65 and ends three months after your birthday month. Now, there are some exceptions to that timing, but — the bottom line is, you’ll likely find it to be less complicated to sign up around your 65th birthday, and then you don’t have to worry that you’ll run afoul of deadlines that can cost you a lot later on.

The bottom line here is that your post-retirement spending plans need to include something for health insurance (more precisely, your Social Security benefit will be reduced by that amount). You can find out more at: https://www.medicare.gov/basics/costs/medicare-costs

The Sixth “Lesson”

Let’s face it, even those of us who have spent our lives thinking about retirement don’t get everything right when it comes to our own.

The irony is that I spent years telling others to plan — and I did - at least sporadically. Ultimately, I focused more on the accumulation side of the retirement equation and less on the spending side.  The good news is, even with the “surprises” noted above, the accumulations appear to have provided a pretty good buffer.   

Retirement is good. Really good, in fact. But it’s even better when you make the easy moves before they become harder ones. If you’re still working and thinking, “I’ll handle that later,” take it from someone three years in:

“Later” comes faster than you think.

-          Nevin E. Adams, JD

[i] See The Biggest Surprise About (My) Retirement

Do Small Businesses (Still) Back Mandatory State-Run IRAs?

  A new report suggests that small business owners broadly support state-run IRA programs — with the strongest backing among newer firms.

Or at least they did.

The just-published survey comes from Pew Charitable Trusts, which has previously (and consistently) chronicled support for these programs among small businesses.  This latest was conducted among employers in three states where that type of legislation has been introduced: Massachusetts, Pennsylvania, and Washington. 

According to Pew, support is strong across the board: 84% of respondents in Massachusetts, 76% in Pennsylvania, and 73% in Washington favor establishing an automated savings program (ASP). The report also highlights bipartisan backing, with majorities of Republican, Democratic, and independent business owners expressing support. 

It further finds “statistically significant” support among newer firms, those with moderate revenues, service-sector businesses, and — perhaps not surprisingly — those that do not already offer a retirement plan. 

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Or Does It?

For starters, the survey combines those who “strongly” support these programs with those who only “somewhat” support them — flattening what may be meaningful differences in intensity. It also excludes “don’t know” or “not sure” responses altogether, effectively removing uncertainty from the results.

And then there’s the timing — each of these surveys was conducted nearly three years ago, in mid-2023.  It seems odd to republish findings with a headline that says “Most Small Business Owners Support…” as a current sentiment, when it’s predicated on perspectives that predate the implementation of these programs.  Consider that Massachusetts didn’t formally adopt one till 2025, Washington only just has — though it’s not slated to be operational till 2027, and Pennsylvania — well, it’s still on the drawing board. 

And then, among the other findings, they further claim (again from three years ago) that members of the state or local chamber of commerce (79%) and the National Federation of Independent Business (75%) support program adoption – an interesting call-out. 

That’s particularly notable in view of the fact that the National Federation of Independent Business (NFIB) has reported[i] nearly the opposite — most recently in Michigan, where just this month they reported that 87% of its members opposed similar legislation.

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So, why “repurpose” three-year-old findings? 

I’ll leave that to your imagination, though it does bring to mind the question: Do small business owners still support these programs? 

The answer, it seems, may depend on who you ask, where you ask, how you ask — and perhaps even …when you ask.

Nevin E. Adams, JD

[i] Michigan’s Small Businesses Caution Against Mandated Retirement Program - NFIB

Brackets, Busts — and Building a Resilient Retirement Plan

 By now, most brackets tied to NCAA March Madness are already busted.

That didn’t take long.

Then again, it never does.

Every March, millions of us confidently — or at least optimistically — predict outcomes in a tournament defined by unpredictability. We study matchups, trends, seeding history, and (too) often assume that the track record of colleges of our youth remains constant — and then watch a 12-seed dismantle our assumptions before the first weekend is out. Though in fairness, alumni affections DO plan a role (well, for those of you whose alma mater makes it into the tournament, anyway).

If that sounds familiar, it should. Because in a lot of ways, retirement planning isn’t all that different. It’s focused (or should be) on projections based on reasonable assumptions — expected returns, steady contributions, rational behavior over time. And then reality intervenes. Markets don’t cooperate. Emergencies emerge. Excrement occurs. Life happens.

And just like that, that “perfect” plan looks a lot like a busted bracket.

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The problem, of course, isn’t that we get it wrong. It’s that we think we won’t.

There’s a certain overconfidence baked into both exercises. In March, it shows up as the belief that this is the year we’ll finally nail the bracket (or that our alma mater will return to its former glory). In retirement planning, it’s the quiet assumption that averages will hold, that risks will materialize neatly and on schedule …

Unfortunately, upsets happen in basketball — and in markets. Call it volatility, sequence risk, or just bad timing, but the effect is the same: outcomes diverge, sometimes sharply, from expectations.

Which is why the real lesson of March Madness isn’t about picking winners.

It’s about surviving uncertainty.

In the tournament, style points don’t matter. Teams advance, or they don’t. A sloppy win counts just as much as a dominant one, and a single bad performance can end a championship run. The best team with the most elegant strategies doesn’t always win.

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Retirement investors face a different structure — but a similar reality. The goal isn’t to “win” every year. It’s to avoid the kinds of losses — particularly at the wrong time — that can permanently alter outcomes. Sequence of returns risk isn’t all that different from a first-round upset: recoverable in theory, devastating in practice.

The teams that make deep runs in March tend to have options — multiple scorers, defensive flexibility, and the ability to adapt when things don’t go according to plan. Retirement plans benefit from the same kind of diversification: across asset classes, across income sources, across strategies that don’t all depend on the same outcome.

Because when (not if) something goes wrong, you need somewhere else to turn.

Preparation for the upset. For the unexpected. For the moments when markets — or participants — don’t behave the way the model said they would or should.

There’s no tomorrow in the NCAA tournament, but the best retirement strategy needs to plan for one. 

-          Nevin E. Adams, JD