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.

The Retirement ‘Hunger Games?’

  Retirement surveys tend to read like actuarial obituaries — a long litany of percentages chronicling regret, anxiety, and insufficient preparation. Unless, of course, you look at the underlying data.

The latest survey from Schroders[i] offers plenty of the former; inflation remains public enemy No. 1; healthcare costs continue to ambush expectations — and more than half of retirees apparently have no idea how long their money will last.

But wait.

Buried inside that grim arithmetic are some surprisingly encouraging signs — and you don’t have to look very far.

For instance, yes, the survey says that 58% of retirees[ii] don’t know how long their savings will last. Which means … 42% actually do (or at least claim to).

Given the complexity of retirement income planning — sequence risk, inflation assumptions, healthcare shocks, longevity projections, required minimum distributions, tax strategy, market volatility, and the occasional Congressional “enhancement” — it’s arguably remarkable (if just a tad unbelievable) that nearly half of retirees feel they have at least some handle on the runway ahead.

Likewise, while only 4% describe themselves as “living the dream,” another 37% say they’re “comfortable,” and 35% report life is “not great but not bad.”

Put differently, roughly 3 out of 4 retirees are somewhere between stable and genuinely content, despite years of inflation headlines and constant (dare I say incessant, strident) warnings about retirement catastrophe. Not that the press release positioning — or media reporting — conveys that sense.

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Yes, NEARLY 1 in 5 say they are struggling financially. But that means that more than 4 in 5 … aren’t.

And perhaps most notably, 79% say retirement gives them freedom to pursue passions and hobbies, while 68% say leaving work opened the door to trying new things.

That matters.

Because for years, retirement industry messaging by both the provider community AND the industry trade press (and don’t even get me started on mainstream media) has leaned heavily into fear: fear of outliving assets, fear of healthcare costs, fear of market crashes, fear of claiming Social Security “wrong,” fear of not saving enough, fear of spending too much, fear of spending too little. Signs of comfort or confidence are routinely dismissed as “naïve” or uninformed. Indeed, the industry’s dominant emotional tone has often been less “golden years” and more “financial Hunger Games.”

To be clear, the concerns reflected in the survey are real.[iii] Ninety percent worry about inflation eroding assets. Eighty-seven percent worry about healthcare costs. Eighty-one percent fear a major market downturn. Those aren’t irrational anxieties — especially when retirees report spending 16% of monthly income on healthcare alone, and most say they expected Medicare to cover more than it does.[iv]

Still, there’s an important distinction between financial pressure and personal despair.

• A rational retiree can be worried and happy.
• Concerned and fulfilled.
• Budget-conscious and optimistic.

The survey quietly reflects that complexity — but the positioning treats those as polar opposites.

And while nearly two-thirds (64%) of retirees wish they had done more planning, exactly how much planning for those kinds of uncertainties would anyone ever consider to be…enough?

In other words, the picture is neither utopia nor dystopia. And, despite the industry press coverage, retirement today appears to be what it has probably always been: a balancing act between financial uncertainty and personal freedom.

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The difference is that today’s retirees are navigating that balance in public, against a backdrop of inflation spikes, market volatility, and relentless media narratives warning that disaster is just one bad CPI report away.

Yet somehow, most retirees still manage to find meaning in their retirement.

And maybe that’s the real headline here. Or should be.

• Nevin E. Adams, JD

 

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[i] See Schroders Study Reveals How Retirees Are Responding to the Affordability Crisis.

[ii] While this retiree certainly knows how to do math and understands longevity tables, if push came to shove, you’d even find ME in that 58% — though I’m hardly clueless about the probabilities. It also makes me wonder if the 42% really do know.

[iii] Even the finding that only 32% currently work with a financial advisor cuts both ways as well. On one hand, it suggests millions may lack professional guidance at precisely the moment retirement income decisions become most consequential. On the other hand, it means nearly one-third are already working with advisors — in an era when retirees have unprecedented access to digital planning tools, educational resources, and increasingly sophisticated retirement income products.

[iv] A perspective I suspect most non-retirees might share with their current health plan coverage.

2025 - The (Retirement) Year in Review - "Revised" - and With a 'Twist'

 I recently did a roundup of some of the most significant retirement-related events of 2025. Then Jack VanDerhei, PhD fed that column through ChatGPT applying the style that famed humorist Dave Barry takes with HIS annual Year-in-Review. The result follows... Enjoy!

The Year in Retirement Plans: 2025

By someone who survived it and would like credit

By almost any measure, 2025 was a remarkable year for retirement plans, largely because it managed to be historically consequential without passing a single massive, system-rewriting law. This is unusual in the same way it is unusual when your roof collapses even though no meteor hit it.

There was no SECURE Act sequel. No Pension Protection Act reboot. Congress flirted with something called the One Big Beautiful Bill, then decided retirement plans should sit this one out, possibly because they were tired. Instead, 2025 delivered something far more subtle and far more exhausting: implementation problems, interpretive confusion, and enough litigation to keep ERISA lawyers hydrated for decades.

Rules were finalized, challenged, revised, challenged again, and then stared at intensely. Courts wrestled with fundamental ERISA questions that everyone thought had already been answered, except apparently not. A new Administration arrived and “recalibrated” several long-held positions, which is Washington code for “pretending we always believed this.” And fiduciaries were reminded, once again, that what really matters is not what happened, but how thoroughly you documented what you meant to happen.

Individually, these developments looked small. Collectively, they turned 2025 into one of the most important retirement-plan years in recent memory, the way a thousand paper cuts can technically count as a major injury.

Let’s relive it. Slowly. Carefully. With coffee.

January

January opened with a regulatory farewell tour from the outgoing Administration. Labor, Treasury, and the IRS issued rules addressing catch-up contributions, auto-enrollment, missing participants, and updates to the Voluntary Fiduciary Correction Program, which is the government’s way of saying, “We noticed you messed up, but we’ll pretend it was an accident.”

Meanwhile, the Supreme Court took up the question of who bears the burden of proof in ERISA fiduciary cases, a topic so exciting it caused several justices to blink slowly. At the same time, the American Airlines ESG case produced the rare legal outcome of “Yes, the process was prudent, but also no, that wasn’t loyal,” leaving observers nodding thoughtfully while quietly wondering if words still had meanings.

February

February brought personnel news, with Daniel Aronowitz nominated to lead EBSA, and legislative déjà vu, as Congress once again introduced a bill to allow 403(b) plans to invest in collective investment trusts. This bill has now been introduced so many times it qualifies for tenure.

Litigation, however, was fresh and energetic. Lawsuits challenged the use of forfeitures to offset employer contributions, including a high-profile case against Charter Communications’ $7 billion plan. A Texas judge upheld the ESG rule, surprising nearly everyone who had read literally anything else. HP won a forfeiture case, which would later become extremely important, like a minor character in a movie who suddenly gets their own sequel.

March

March brought confirmation of Lori Chavez-DeRemer as Secretary of Labor, followed immediately by more lawsuits, because the universe insists on balance.

New healthcare fiduciary claims hit JPMorgan. Johnson & Johnson saw a previously dismissed case resurrected, proving that no lawsuit is ever truly gone. One of the many BlackRock LifePath challenges was dismissed with prejudice, while Clorox discovered that winning once does not guarantee winning again, especially when forfeitures are involved.

April

April was the month litigation stopped being theoretical.

The Supreme Court ruled unanimously in the Cornell University case, clarifying exactly nothing in a way that encouraged everyone to file more lawsuits. Then came a rare ERISA jury trial against Pentegra, resulting in a $39 million verdict and the sudden realization that juries exist.

Meanwhile, fiduciaries scored a win in the first pension risk transfer case, suggesting that at least sometimes, moving liabilities off your balance sheet does not automatically make you a villain.

May

May was dominated by the One Big Beautiful Bill, which turned out to be neither particularly beautiful nor relevant to retirement plans. Still, momentum continued on the 403(b)-CIT front, and the IRS announced a modest increase in HSA limits, which thrilled dozens of people.

Litigation pressed on. Forfeiture cases multiplied, some were dismissed, and one settled quietly, like a family argument everyone agreed not to mention again.

June

June brought a regulatory pivot. The Labor Department reconsidered its ESG rule and rescinded its prior crypto warning, returning to a neutral stance best summarized as, “You’re adults. Please stop asking us.”

Courts, meanwhile, began dismissing forfeiture cases with increasing confidence. Wells Fargo and JPMorgan prevailed, with JPMorgan’s victory coming with prejudice, which in legal terms means “please stop.”

July

July featured new guidance on pooled employer plans, which raised many questions and answered several others incorrectly. More notably, the Labor Department filed an amicus brief supporting fiduciaries in the HP forfeiture appeal, causing observers to double-check the calendar.

The Pentegra case settled for $48.5 million, confirming that jury verdicts are not just theoretical exercises. A Texas court invalidated part of the fiduciary rollover rule, echoing Florida, because nothing says consistency like multiple courts disagreeing in harmony.

August

August delivered an executive order encouraging retirement plans to consider private markets, including alternatives, digital assets, real estate, and lifetime income products. This marked the first time all of these were mentioned together without anyone visibly sweating.

Litigation continued, with Empower sued over alleged misuse of participant data to cross-sell managed accounts, joining TIAA and Morningstar in the rapidly growing genre of “You had the data, but should you have used it?”

September

September brought the confirmation of Daniel Aronowitz as EBSA head, thanks to a procedural maneuver best described as “now everyone is confirmed, please stop emailing us.”

The IRS finalized Roth catch-up rules effective in 2027, which somehow managed to confuse people about a requirement scheduled for 2026. The SEC fined Vanguard and Empower over managed account disclosures, and the American Airlines ESG case concluded with governance changes but no damages, proving that sometimes everyone loses differently.

October

A government shutdown slowed activity, but not enough to prevent the release of Social Security COLA figures, because retirees notice.

Courts dismissed several pension risk transfer cases for lack of harm, while allowing others to proceed based on the possibility that harm might someday exist if the universe cooperated.

November

Post-shutdown, the IRS released 2026 contribution limits and the updated FICA threshold, reminding everyone that math is relentless.

More forfeiture cases were dismissed, some explicitly citing Labor’s HP amicus brief. New cases appeared anyway, because hope springs eternal. Advisors sued the Labor Department. Attorneys sought fees. Everyone was very busy.

December

December ended the year emphatically.

The Labor Department urged the Supreme Court to review major ERISA issues, siding with fiduciaries and explicitly reversing its prior positions, which is rare and also deeply confusing to historians. The Department abandoned its defense of the fiduciary rule while hinting at a replacement, because suspense matters.

Schlichter Bogard rolled out a new wave of lawsuits targeting voluntary benefits, proving there is always another category. A Johnson & Johnson healthcare case was dismissed. The Department requested more time in Honeywell, suggesting another amicus was loading.

Congress passed a bill allowing 403(b) plans to invest in CITs, plus floated auto-IRAs, Roth rollovers, ERISA lawsuit reform, and expanded emergency savings, all of which may or may not happen, but felt important at the time.

What Did We Learn?

The defining feature of 2025 was not transformation, but stress-testing. The system was tested. Employers were tested. Courts were tested. Fiduciaries were tested, mostly on whether they kept enough meeting minutes.

And somehow, the system held. Not gracefully. Not efficiently. But it held.

Going into 2026, there will be more lawsuits, more rules, and more confident statements that turn out to be provisional. But 2025 proved something important: retirement plans continue to function not because they are perfect, but because the people running them are persistent, pragmatic, and very good at reading footnotes.

Preserving the system will require less noise, clearer rules, fair enforcement, and a collective agreement that prudence does not require clairvoyance.

On to 2026. Please stretch first.

- Nevin E. Adams, JD (and ChatGPT)