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How to Tear Down Barriers to In-Plan Annuities

Certain policy changes and the right support for plan sponsors could make it easier for plans and participants to embrace lifetime income solutions.

By Javier Simon | October 06, 2017
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According to a recent study by the Plan Sponsor Council of America (PSCA), only 5% of plans offer guaranteed-retirement-income products in-plan. Sponsors cite several reasons for why they are cautious about adding these products to their plans, ranging from fiduciary risk to participant-communication challenges. 

Derek Dorn, head of public policy at TIAA, argues that certain policy changes could make it easier for plan sponsors and their participants to embrace lifetime-income products such as annuities. In fact, he tells PLANSPONSOR, a safe harbor provision for offering the options already exists; however, it can use some polishing.

The Department of Labor (DOL) has provided some guidance on selecting in-plan options, but Thea new white paper by TIAA notes that many sponsors are particularly confused about how to evaluate the financial strength of an insurance provider. Such entities are regulated differently across state lines, and “there is no centralized marketplace for insurance products that provides standardized comparative information," the white paper states. However, TIAA also notes that the Retirement Enhancement and Savings Act of 2016 (RESA) can help here.

This legislation makes readily available “standardized information, generated through the process of state examination and licensing, about the financial strength of an insurer.” TIAA says RESA can amend the Employee Retirement Income Security Act (ERISA) to allow fiduciaries to qualify for the safe harbor by indicating that the insurer has operated under a valid certificate of authority from its home state for the current and preceding seven years, has filed audited financial statements and maintains the reserves required by state law; will undergo a financial examination at least every five years in its home state; and will notify the fiduciary of any change in circumstances.

But in the event that a plan sponsor needs to replace or remove an annuity option, the portability process can be improved as well. TIAA notes that if such an action can be treated as a distributable event, “any participant invested in the product would be eligible to convert the annuity contract to an individual certificate or roll over the entire amount invested in the contract to an IRA [individual retirement account] that includes the insurer’s equivalent (or near-equivalent) lifetime-income product. An approach along these lines is reflected in RESA.”

TIAA argues that sponsors could also find fiduciary protection if in-plan annuities could be more easily incorporated into qualified default investment alternatives (QDIA).

But even if lifetime income products become more widely adopted by defined contribution (DC) plans, participants would still need to find the benefit of investing in these products.

NEXT: Helping participants embrace lifetime income