At a mid-August meeting of the Labor Department's ERISA Advisory Council, industry officals met in Washington to discuss how to boost plan sponsors' use of lifetime income options in retirement plans.
Fred Reish, partner at Drinker Biddle & Reath, recommended in his testimony that the Advisory Council "focus on enabling a wide range of solutions and on creating flexibility for future developments" in the lifetime income space. "If allowed, the creative genius of the marketplace will provide solutions."
The financial services industry, Reish said, has provided "a wide range of 'solutions' to fulfill the accumulation and decumulation needs of plans and participants," including target date funds, managed accounts, managed payment funds, individual annuity contracts and guaranteed minimum withdrawal benefits and guaranteed lifetime withdrawal benefits.
"It is likely that other products and services will be developed in the future," Reish continued. "As a result, recommendations by the Advisory Council should not prefer any product or service over another, nor should it be limited to current solutions; instead, the recommendations should be neutral as to products and services and should allow freedom for new solutions to be developed."
While the focus of defined contribution plans primarily has been on the accumulation of retirement accounts, "it is now shifting to 'decumulation,'" Reish noted, "that is, a stream of income after retirement — largely because of the aging of the baby boomers and their ongoing retirements."
Both Reish and Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council, detailed to the council what they view are the "numerous obstacles" to lifetime income options in workplace retirement plans — including fiduciary liability, lack of demand by participants and the need for greater education.
"A clear, simple safe harbor is a necessary first step to increase the interest of plan sponsors in adding lifetime income options to their plans," Dudley said.
Dudley reported to the council results of an ABC informal poll of its plan sponsor members regarding lifetime income products. Of the 93 company responses received, only 13 (or 14%) indicated that their organizations offer a lifetime income option as part of their defined contribution retirement savings plans.
Of the 76 organizations that do not, almost two-thirds might consider such an option in the future; for these organizations, the leading cause of hesitation was "potential fiduciary liability," followed closely by "lack of demand from participants," Dudley said.
In response to a question about the most useful potential policy change to address these concerns, the most popular answer was setting up a "better safe harbor for selecting an annuity provider," to protect employers from lawsuits under ERISA's fiduciary standard. "With this low demand for lifetime income options, employers may be hesitant to take on potential fiduciary liability for an option for which few employees have expressed an interest," Dudley told the panel.
While new investment products "are promising," Dudley said, "more needs to be done to familiarize plan sponsors with the pros and cons of lifetime income options and to help them educate their participants on how to use these products effectively."
