Compliance February 15, 2022

House HELP Committee Members Introduce Lifetime Income Legislation

The bill, which has been introduced in previous legislative sessions, would allow annuities to be a default investment in employer-provided 401(k) plans.

Reported by

PA PS - Lifetime Income Legislation

U.S. Representatives Donald Norcross, D-New Jersey, and Tim Walberg, R-Michigan, both members of the House Committee on Education and Labor, have reintroduced the Lifetime Income For Employees Act, known as the LIFE Act for short.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The legislation would allow annuities to be a default investment in an employer-provided 401(k), with the stated goal of supporting workers as they seek to build a steady, guaranteed income stream during retirement. Specifically, the LIFE Act addresses certain requirements in the qualified default investment alternative regulatory safe harbor that prevent some employers from being able to benefit from the safe harbor if they include annuities as part of their retirement plan’s default investment.

By making these changes, the LIFE Act builds upon the Setting Every Community Up for Retirement Enhancement Act provision that enhanced the safe harbor on which plan sponsors rely when choosing an annuity provider for their retirement plan. While the enactment of this improved safe harbor was a significant step, Norcross and Walberg say the LIFE Act will take the critical next step and ensure more savers have access to annuities.

“American workers are concerned about retirement and their concerns are not unfounded,” Norcross says. “Seven out of 10 Americans say they’re living paycheck to paycheck and 80% say they’ll need to work in retirement due to lack of savings.”

Norcross says the number of private-sector workers receiving lifetime benefits from a traditional defined benefit pension plan has declined dramatically since the 1980s. He cites his own experience as a retired electrician to note how important pensions are to workers who rely on them for their retirement.

“By creating ‘individual pensions,’ this legislation will provide hard-working Americans with a guaranteed income so they can retire with dignity,” he says.

Walberg echoes those sentiments and says he is pleased to work with Norcross on a bipartisan effort to help families achieve financial security after a lifetime of hard work.

Supporters of the LIFE Act include Thasunda Brown Duckett, CEO of TIAA. In an open letter published to recognize the reintroduction of the LIFE Act, she says annuities are vital to retirement security because they are the only products that can provide individuals with guaranteed returns and a guaranteed stream of income in retirement.

“Increasingly, retirement plan participants rely on their plan’s default product as their long-term investment strategy,” Brown Duckett says. “While many participants mistakenly believe the default option provides a guaranteed retirement income, most QDIA products do not. By amending the QDIA safe harbor, the LIFE Act will encourage more employers to adopt annuities as part of their default offering so that more Americans will be able to transition seamlessly from saving for retirement to benefiting from a guaranteed income stream when they retire.”

Ahead of potential debate and passage of the new legislation, plan sponsors and advisers are now preparing for defined contribution plan participants’ reactions to the lifetime income estimates that will be coming on their plan statements this year.

In the SECURE Act, Congress required that DC plans provide retirement plan participants with projections illustrating monthly retirement income amounts generated from their accumulated retirement savings. The Department of Labor’s interim final rule on the matter, published in September, requires that participants’ projected income be illustrated as an account balance conversion to a lifetime income annuity.

Data & Research February 15, 2022

DC Plan Investment Menu Evolution Continues

One telling stat identified in new NEPC research is that managed account adoption has remained stagnant for several years now, while index-based target-date funds have grown in popularity.

Reported by

NEPC has published its annual “Defined Contribution Plan Trends and Fee Survey” results, compiling the responses of nearly 140 DC retirement plans with $230 billion in aggregate assets owned by some 1.6 million participants. The average plan in the sample includes $1.7 billion in assets, while the median holds $728 million.

According to the analysis, retirement wealth has risen tremendously over the past five years, such that the growth of plan assets may offer fiduciaries the opportunity to consider different vehicle structures or investment solutions—namely collective investment trusts, separate accounts and custom solutions.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The NEPC survey shows that, at least in the large-plan market segment, target-date funds continue to be the go-to default investment selection. A whopping 97% of plans in the sample offer a TDF, with 95% using the option as the plan default. The continued growth of plan assets in TDFs is, in this sense, reducing the importance of the core menu, NEPC says.

According to NEPC, one of the most prominent trends identified in the past year is a move toward index-style funds, with 38% of plans now offering index-based TDFs. At the same time, 70% of plans offer a “tier” of three or more index funds in the core menu. The median percentage of plan assets invested in core menu index funds is 15%.

Beyond the indexing trend, the survey results suggest guaranteed retirement income solutions and environmental, social and governance-themed investments will slowly but surely progress in 2022. Nearly all plans in the sample offer the makings of a “retirement tier,” but many continue to lack an option providing guaranteed lifetime income. Meanwhile, NEPC says many active managers are starting to consider ESG approaches.

Other investment menu trends identified in the research include the following:

  • 66% of plans offer stable value, while 53% offer money market;
  • 32% of plans offer Treasury inflation-protected securities, but take-up is low, indicating that TIPS’ role in protecting purchasing power for participants drawing an income may be misunderstood, given their price volatility;
  • 12% of plans offer high-yield fixed income;
  • 11% of plans offer real estate investments; and
  • 24% of plans offer a dedicated emerging markets option.

Discussing the research results with PLANADVISER, Bill Ryan, partner at NEPC and head of DC solutions, says one perhaps surprising finding identified in this year’s survey is that the rate of adoption of managed accounts has remained flat for the past three years. Specifically, back in 2019, 37% of plans in the survey offered some type of managed account. This figure actually fell to 36% in 2020 before climbing again to 38% as of the end of 2021.

“This is somewhat counter to expectations, given the strong marketing promotion by recordkeepers,” Ryan observes. He says this dynamic is a bit puzzling on first blush because, overall, when offered at a reasonable fee level, managed accounts can be a useful solution to help participants meet individualized objectives.

In fact, in Ryan’s view, it is likely that technology developments and platform investments by recordkeepers will reverse this dynamic, mainly by bringing the price of managed accounts closer in line with those of target-date funds.

“We are seeing tremendous levels of investment by the top recordkeepers in the types of technology and back-end systems that should make managed accounts far cheaper and scalable,” Ryan observes. “Similar to the way prices have fallen substantially in the TDF market, I think we can expect prices on managed accounts to fall dramatically in the near- to mid-term future—say over the next three to five years, if not sooner.”

Ryan says leading recordkeepers are also investing heavily in the types of systems and solutions that should allow them to help address their retirement plan clients’ more immediate financial needs. For example, more recordkeepers are building out capabilities that will allow them to support their clients as they pay down student loan debt or as they save for short- and long-term health care expenses via tax-advantaged health savings accounts.

The other important trend Ryan points to involves the use of custom investment solutions by large retirement plans. For some time now, he says, the assumption in the marketplace has been that large plans choose to use custom investment solutions in order to give their participants access to novel investment types—perhaps private placements or special types of real estate. While this has been a trend, Ryan says, increasingly, the use of custom investment solutions by large DC plans is taking on a bit of a different character.

“Increasingly, the use of custom investments is actually a new strategy being implemented to address what we can call ‘managed concentration risk,’” Ryan says.

He explains the idea is that if a plan with, say, $5 billion in assets has a big chunk of that invested in a large-cap U.S. equity fund, this means the plan is going to have a very large sum of money, perhaps on the scale of a $1 billion or $2 billion, with a single investment manager. Using custom funds allows the plan sponsor to allocate large-cap U.S. investments across two or three managers, which in turn reduces the risk that an unexpected problem with a single investment manager will cause a huge amount of disruption for the plan.

“With this approach, if a manager change has to happen, it does not require liquidating the entire holding, but only a portion,” Ryan explains. “I think this is a strategy that we can expect to become very popular among the largest DC plans.”  

«