The
retirement security of millions of Americans participating in
employer-sponsored defined contribution (DC) plans would be improved by
providing more options supporting secure lifetime income within those plans,
the American Academy of Actuaries said in a position statement.
“Retiring
DC plan participants currently have few tools to efficiently manage their
account balances for a long and secure retirement. Adding lifetime income
options to these plans—supported by appropriate laws, regulations, and
educational initiatives—will enhance the financial well-being and security of
the next generation of retirees,” says Academy President-Elect and Chairperson
of the Academy’s Public Interest Committee Stephen Alpert.
Annuitization
and structured withdrawal programs are just two examples of the types of
options cited by the Academy that could be included in DC plans to help
mitigate risks to retirees by providing them with more predictable income than
a lump-sum or unstructured or self-managed withdrawal approach.
The
Academy is using the release of the position statement to kick off a campaign
to educate public policymakers, employer organizations and other stakeholders
in the retirement policy space about the benefits of establishing retirement
income options within DC plans.
“Safe
harbors, enabling legislation, and other regulations are needed to cover areas
such as selecting providers, developing solutions, educating employees, and
implementing income strategies to minimize plan sponsor fiduciary concerns,”
the position statement says. “Providers and employers will need to partner to
develop appropriate solutions and educate employees about the options and
opportunities available to them.”
The
Academy is not the only entity advocating for in-plan lifetime income solutions.
The Government Accountability Office (GAO) provided recommendations to the Department of Labor (DOL) to address plan sponsor concerns about
offering lifetime income options in their plans, including that it clarify the
criteria to be used by plan sponsors to select an annuity provider.
Just last week, the
U.S. Treasury Department called for the creation of an annuity oversight bureau to assess the viability of annuity providers, so
retirement plan sponsors would be more inclined to offer in-plan guaranteed
lifetime income options. While the Department of Labor (DOL) issued a safe
harbor rule in 2008 with respect to annuities, saying that employers who
“appropriately” consider “sufficient” information as to whether the annuity
provider will be able to make payments under the annuity contract will be
protected from legal liability in the case that the insurer becomes insolvent,
the Treasury says the terms are not clearly defined—and that the safe harbor
still requires employers to consider whether the provider will be solvent
decades into the future. Thus, Treasury says, “many employers and their
professional advisers are not comfortable relying on the safe harbor.”
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DOL and SEC Uniform Advice Standard May Not Be Far Off
Leadership at both the DOL and SEC have signaled a willingness to work together to find complementary approaches to managing advisers’ conflicts of interest—but it will be a heavy lift to accomplish a uniform standard.
In June of this year the Securities and Exchange Commission (SEC)
published a request for public comment on standards of conduct applicable to
investment advisers and broker/dealers when they provide investment advice to
retail and retirement investors.
The request was among the first actions taken by the SEC
under the new leadership of Chair Jay Clayton. President Donald Trump nominated
Clayton on January, 20, 2017, but he was not confirmed by the Senate until early
May. At the time, industry watchers agreed the likely style and character
Clayton might bring to the commission would differ from the ostensibly aggressive approach of the Obama-era Chair, Mary Jo White.
To date Clayton has stayed relatively quiet in his new
position, and it remains somewhat unclear what long-term direction the SEC is
taking under President Trump. In a brief public statement delivered June 1, Clayton said he “welcomes
the Department of Labor’s invitation to engage constructively as the Commission
moves forward with its own examination of the standards of conduct applicable
to investment advisers and broker/dealers, and related matters.”
Clayton’s comments continued, acknowledging that this work
will directly intersect with the Department of Labor’s (DOL) own ongoing effort to
revamp the fiduciary standard under the Employee Retirement Income Security Act
(ERISA): “I believe clarity and consistency—and, in areas overseen by more than
one regulatory body, coordination—are key elements of effective oversight and
regulation. We should have these elements in mind as we strive to best serve
the interests of our nation’s retail investors in this important area.”
In the time since Clayton made those comments, the SEC has
received a small library’s worth of fresh investing industry commentary on the
multifarious issue of identifying and preventing advisory industry conflicts of
interest. Many of the comments mention serious discomfort with the DOL’s strengthening
and expansion of its fiduciary standard, voicing a whole host of now-familiar concerns that a stricter DOL conflict of interest
paradigm may unnecessarily jeopardize well-established compensation practices
that have only recently become the object of scrutiny and are not in themselves
problematic.
One particularly interesting and informative comment letter was submitted recently by the Financial
Services Institute (FSI), which lobbies for the interests of the independent
financial services community. The perspective of the FSI letter is clearly informed
by the fact that its membership includes financial advisers who are technically
self-employed independent contractors, rather than employees of large broker/dealers
or wirehouses.
The main conclusion of the comment letter from FSI is that “any
future rulemaking should build upon, and fit seamlessly within, the existing
and long-standing securities regulatory regime for broker/dealers and investment
advisers, while being supported by robust examination, oversight and
enforcement by the SEC, FINRA and state securities regulators.” Further, FSI “agrees
with Chairman Clayton that a uniform standard should be clear and
comprehensible to the average investor, consistent across retirement and
non-retirement assets and coordinated with other regulatory entities, including
the Department of Labor and state insurance regulators.”
NEXT: Detailed
arguments from FSI
Importantly, the FSI letter is far from outright hostile to
the possibility of strengthened conflict of interest rules. For example, the
letter states that “FSI members believe that acting in their client’s best
interest means that financial advisers shall place the interests of their
client before their own; avoid material conflicts of interest when possible or
obtain informed client consent to act when such conflicts cannot be reasonably avoided;
and provide advice and service with skill, care and diligence based upon the information
known about their client’s investment objectives, risk tolerance, financial
situation and needs.”
This is exactly what the DOL leadership under President Obama
said it wanted to accomplish, but FSI contends the DOL should not be taking the
lead on any of this: “The SEC can integrate any future standard of care into
the investor protections provided by the existing regulatory framework.” To
accomplish this, FSI suggests that financial institutions and financial advisers
“should be required to implement policies and procedures reasonably designed to
manage material conflicts of interest; and where such conflicts cannot be
avoided, to adhere to a two-tiered disclosure regime consisting of a concise
disclosure document to be supplemented with more detailed disclosures posted to
the financial institution’s web site.”
The full details are available in the main text of the
letter, but in basic terms this approach would replace the DOL’s controversial best-interest contract exemption structure. FSI does seem to think some
type of disclosure and exemption process will be necessary moving forward—but not
the approach coded into the DOL fiduciary rule as it currently stands. Under FSI’s proposal, the first-tier
disclosure will “serve to inform investors of the information that is most
critical to their decision making at the point in time when that information is
most useful and can be delivered most efficiently. Thus, these disclosures
ensure that customers understand the best interest standard of care owed to
them by the financial institution and the financial adviser.”
The second-tier disclosure “would provide investors with
access to detailed compensation and material conflicts information via the
financial institution's website or, upon request, in hard copy. The website
would provide investors with detailed information concerning available investments,
considerations for making investment decisions, and information explaining how
a financial adviser and a financial institution receive compensation for each
type of product. The disclosures would be designed to allow investors to better
understand both the existence of payments to be made to the financial institution
and the purposes of such payments, similar to existing revenue sharing
disclosure obligations.”
Whether or not the above approach is adopted or even considered, the best interest standard “must be designed to
appropriately address conflicts of interest because they may arise in any
relationship where a duty of care or trust exists between two or more parties,”
FSI concludes. “Indeed, being completely conflict free is not possible for
financial advisers … We recommend that any SEC rulemaking require firms to develop
and implement policies reasonably designed to identify, manage and mitigate
conflicts. Given the complexity of the subject, the fast pace of industry
innovation, and the firm-specific nature of conflicts, it is important that
such a rulemaking take a principles-based approach to allow firms to tailor
their policies and procedures to their unique business models.”