I recently testified before the Department of Labor’s ERISA Advisory Council on the subject of lifetime income. More specifically, it was about lifetime income products and services for retirees provided through defined contribution plans. Here are my opening comments:
Thank you for this opportunity to testify.
I am Fred Reish, a partner in the law firm of Drinker, Biddle and Reath. However, this testimony is not on behalf of the firm, but instead represents the views of my partner, Bruce Ashton, and myself.
As a starting point, it is helpful to have a foundation for development of recommendations. For example, I suggest:
- The conversation about defined contribution plans needs to increasingly and emphatically include retirement income.
- Plan sponsors and participants need good quality, reasonably priced retirement income products and services.
- Plan sponsors need clear, objective and implementable guidance on how to do that.
- Participants need information, education and advice on how to best use those products and services.
- Both plan sponsors and participants will benefit from the use of knowledgeable fiduciary retirement income consultants.
- Any guidance should be agnostic as to retirement income products and services. Participants may need a combination of products and services to properly address their needs.
Here are more detailed thoughts that could inform decisions for going forward:
1. The safe harbor regulation for annuities in defined contribution plans does not work and will not work. Plan sponsors, by and large, are not in a position to determine if those criteria are satisfied.
2. If a new safe harbor regulation is developed, it needs to be objective and obvious, in the nature of a checklist of items to obtain, but not to be reviewed at the level of an insurance expert.
3. Insurance consultants are expensive and they are few-and-far-between. But, if used as independent fiduciaries at a platform level, similar to 3(21) and 3(38) fiduciary investment advisers on 401(k) recordkeeping platforms, the cost can be borne by insurance companies or spread over thousands of plans and millions of participants.
4. Plan sponsors are more likely to provide services to participants if they can do so in a context of providing information and education, and plan sponsors are more likely to use products and services approved by fiduciary advisors and consultants.
5. In that vein, plan sponsors are more likely to embrace concepts if the service providers are legally responsible. As a result, plan sponsors should be able to rely on their providers (for example, recordkeepers) for that purpose, so long as they do not have a reason to doubt the competency of the providers. In the real world–and especially for small- and mid-sized plans, that is what is already happening–and the rules should parallel the real world in this case.
6. Participants need help making decisions about retirement income products and services. They are not, by and large, educated or experienced in the analytical processes for determining which products or services to select for 20 or 30 years into the future or the amounts to be allocated among such products and services. This is analogous to the fiduciary services that participants receive for investing their accounts, for example, target date funds and managed accounts.
7. It may not be realistic to expect participants to make lifelong decisions in the period of days immediately before they take retirement distributions. If retirement income products or services are accumulated during participation in a plan, they are more likely to be used in retirement. That is true of insured products and securities products and services.
8. Target date funds are popular with both plan sponsors and participants. They are likely to be a popular way to provide non-guaranteed retirement investment income or to accumulate guaranteed retirement income products. As a result, guidance should be issued to make clear that is permissible. Defaults work and should be considered, particularly where a participant’s account has been invested in a manner that incorporates retirement income services and products during the accumulation phase. The Department should recognize the power of its guidance–even soft guidance, for example, look at the favorable impact Interpretive Bulletin 96-1 had on investment education.
9. It is not possible to develop perfect answers to these complex problems. However, we should not let the perfect be the enemy of the good. Good answers will do the job.
10. Products and services will be developed in the future that are not even imagined today. Any guidance should be flexible to allow future developments.
With those thoughts in mind, I recommend the following:
1. The Department of Labor should discuss 401(k) and other defined contribution plan vehicles for retirement income. Words matter. Retirement income projections are not just projections—they are perspective. I cannot think of a better way to change the perspective and, thereby, change the conversation.
2. The Department should affirmatively state that insurance and annuity products are, in concept, prudent for defined contribution plans and should simplify its annuity safe harbor regulation. We support the legislative proposals on this matter, but suggest that additional objective safeguards be added. In addition, clarify the QDIA safe harbor to include annuities in each of the three QDIA options, that is, target date funds, balanced funds and managed accounts.
3. The Department should issue guidance that the concepts in the SunAmerica Advisory Opinion and the Pension Protection Act advice exemptions apply to retirement income products and services–at both the plan sponsor level and the participant level, so that plan sponsors can receive advice on the prudence of retirement income insurance companies and guarantees, and so that participants can receive advice on how to use those guaranteed products and investment products and services. It should be clear that the independent fiduciary is the responsible fiduciary, and not the plan sponsor. For example, DOL Field Assistance Bulletin 2007-01 applies a similar approach to participant investment advice.
4. The Department should issue guidance that platforms of retirement income products and services are analogous to brokerage windows, and therefore the platform, but not the products and services, needs to be vetted by plan sponsors as fiduciaries.
5. The Department should issue new guidance focusing on retirement income similar to Interpretive Bulletin 96-1 to the effect that education can be provided about retirement income products and services in the plan, and it would not be considered fiduciary advice.
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The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.