Data & Research November 28, 2023

LIMRA: Plan Advisers Will Play Key Role in Future of In-Plan Annuities

Of plan sponsors considering an in-plan annuity, 79% do so through a plan consultant or adviser, according to a LIMRA study.

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Plan advisers will play a key role in in-plan annuity options’ trajectory in the next 12 months, according to research by trade group LIMRA released Tuesday.

As of now, an estimated nine out of 10 defined contribution retirement plans do not offer participants an in-plan annuity option, according to LIMRA. That has been the case for years despite a push from insurance providers for in-plan options, but 2024 may finally be a “tipping point,” the insurance trade group wrote in its report.

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According to the survey of 566 private sector plan sponsors with at least 10 full-time employees, about three in four sponsors will be making a decision about adding an in-plan option within the next 12 months.

“Paternalistic employers do not want their current and former employees to fend for themselves,” LIMRA’s researchers wrote in an executive summary of the report. “They would rather make certain decisions for their employees, on the grounds that it will be to their employees’ financial benefit in the long run.”

Earlier this month, Transamerica Corp. and payroll provider ADP Inc. separately announced annuity offerings to plan participants. Transamerica’s is a partnership with a State Street target-date-fund series that embeds the annuity into the glide path. ADP’s offering is through Hueler Companies’ Income Solutions, which offers participants a choice of institutionally-priced annuities.

LIMRA noted in the report that the definition of an in-plan annuity could be an annuity inside a target-date fund, an annuity that linked to the retirement plan or a separate, stand-alone annuity sold to participants via the plan.

Among plan sponsors already offering in-plan options, many are doing so as the qualified deferred investment alternative, according to Matt Drinkwater, corporate vice president of annuity and retirement income research at LIMRA.

“The qualified default investment alternatives (QDIA) results indicate that the in-plan annuities are often (but not always) the designated QDIA, most often a target-date fund,” he wrote via email. “We didn’t see any differences [in whether it’s a QDIA or not] by size of plan or size of employer.”

About half (49%) of plan sponsors surveyed who do not offer an in-plan option have considered adding one “at some point,” LIMRA found.

Advisers Key

LIMRA noted that large, established plan sponsors have been first to offer participant in-plan annuities, with growing interest coming from the smaller end of the market. It also found that plan advisers or consultants often play a key role in a plan sponsor considering an in-plan option, coming in second among the top reasons for providing the option.

The reasons, in order, were:

  • Plan sponsors feel obligated to help employees have income in retirement (43%);
  • Plan sponsors had an in-plan option recommended by a plan consultant/adviser (39%);
  • Plan sponsors feel the best place to create retirement income is from the plan (37%);
  • Plan sponsors want to manage workforce turnover/retirements by providing an income option (36%);
  • Employees are demanding the option (35%); and
  • Plan recordkeepers are recommending the option (22%).

LIMRA also cited a “strong connection” between employers who offer or have offered defined benefit pensions in the past and current interest in providing in-plan annuities.

“Employers offering DB pensions—active or frozen—tend to offer in-plan annuities to a greater extent than do employers who do not have DB pension plans,” LIMRA researchers wrote in the executive summary. “Also, employers who used to offer DB pensions are more likely than other employers to offer in-plan annuities.”

Earlier this month, PLANSPONSOR, a sister publication of PLANADVISER, reported that technology giant IBM plans to replace its 401(k) employer match with automatic contributions to its cash balance plan. The new retirement benefit will create what a spokesperson for the firm called “a stable and predictable benefit that diversifies a retirement portfolio and provides employees greater flexibility and options.”

Obstacles 

There are still several obstacles to wholesale implementation of in-plan annuities, according to LIMRA.

The biggest block, according to the trade group’s executive summary, is lack of demand among employees. That dearth of interest, however, may be due to lack of knowledge about the potential for a guaranteed paycheck, according to the researchers.

“The vast majority of workers have either never heard of in-plan annuities or know little about them—not enough to make a fully informed decision about how appropriate they might be,” LIMRA researchers wrote. “Also, demand can be increased by employers, by taking the time to explain them, offering group meetings, and building broad awareness prior to adding an in-plan annuity.”

Many employers are also concerned with the products themselves, citing cost, complexity and lack of portability across retirement plans among their reasons not to offer in-plan annuities.

Limited attention and resources of human resource departments may also play a role in the lack of uptake, LIMRA noted. Smaller employers are particularly apt to pass on annuities for this reason and would be more likely to bring them on if presented as “turnkey, plug-and-play” solutions in plan design.

Finally, fiduciary concerns about providing in-plan options were mentioned by plan sponsors but were generally lower down on the list of issues, LIMRA’s researchers wrote. Fiduciary concern has likely abated in recent years after in-plan annuities were approved by regulators, including in 2019’s Setting Every Community Up for Retirement Enhancement Act, according to the researchers.

Whatever the outcome of in-plan uptake, LIMRA made clear the role plan advisers and consultants will play in their future: 79% of plan sponsors who do not yet have an in-plan option relied on advisers or consultants when evaluating the option.

“Building awareness and buy-in among the plan advisor community will be critically important for the growth of the in-plan annuity market,” LIMRA researchers wrote.

LIMRA surveyed 209 sponsors of DC plans offering in-plan annuities and 357 sponsors of DC plans that do not offer in-plan annuities. Results were weighted to ensure they were representative based on plan size for DC plans with 10 or more active participants.

Compliance November 27, 2023

Crypto Remains Massive Compliance Risk for Retirement Fiduciaries

Last week, Binance, a crypto exchange, was hit with a record-breaking Treasury settlement.

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Wagner Law Group, an ERISA law firm, has previously cautioned retirement plan fiduciaries on the risks of using cryptocurrency investments in their plans, in large part because of the industry’s frequent compliance issues.

On November 20, the Securities and Exchange Commission charged Kraken, a crypto exchange, for operating as an unregistered securities exchange. This prompted Wagner Law Group partner Kimberly Shaw Elliott to caution fiduciaries of the risks of crypto assets, given their compliance issues:

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“The SEC’s new enforcement activity should be a clear warning to not only unregistered crypto providers and the advisers who recommend crypto investments, but also to retirement plan fiduciaries who approve those investments,” she wrote. “Is it prudent to place faith in the seller or holder of crypto who does not go through the rigors of registration?”

The Department of the Treasury issued a record-breaking multi-billion dollar fine against Binance the next day, further compounding the fiduciary risks of crypto assets.

The fines totaled approximately $4.3 billion against Binance Holdings Ltd., a crypto exchange, among other penalties. The SEC had, in June, charged Binance with operating as an unregistered securities exchange, and those allegations have not yet been resolved.

Of the Binance fine, Marcia Wagner, the founder and managing partner of Wagner Law Group, says, “I do not believe that the amount of the fine, per se, will have an effect upon a plan fiduciary’s decision whether to include or possibly remove or reduce the level of crypto assets in some form on its investment platform, but the fact of the SEC action against Binance, as well as other recent events such as the fraudulent activities of FTX, would clearly be a factor a plan fiduciary would need to take into account as part of its due diligence in determining the prudence of such an investment.”

She added that, “since the Department of Labor guidance regarding cryptocurrency, in my experience, clients have not shown an interest in including crypto assets on their investment platform, if for no other reason than the litigation risk if a crypto asset fund on a plan’s investment platform went sideways. That litigation risk is now obviously heightened.”

According to the Department of Justice, Binance pleaded guilty to a wide range of money laundering, sanctions and unlicensed money transmitting as part of its settlement.

The fines break down into two parts: one for about $3.4 billion, issued by the U.S. Financial Crimes Enforcement Network for money-laundering violations, and another for $969 million, issued by the Office of Foreign Asset Control, for more than 1.5 million individual violations of U.S. sanctions policy.

According to the settlement reached with the OFAC, though Binance was fined $968 million, the maximum statutory penalty for its alleged sanctions-related offenses was actually $592 billion. OFAC found that Binance’s violations “were egregious and were not voluntarily self-disclosed.” These violations took place from August 2017 through October 2022.

Most of the trading volume, or about $600 million, involved transactions with Iranian persons. The rest of the volume included people in Syria, North Korea, Cuba and Russian-occupied territories of Ukraine, including Crimea, according to the OFAC.

The OFAC found that Binance encouraged U.S. users to use virtual private networks or to provide foreign passports, if they were multinationals, as a way to maintain the appearance of compliance with U.S. law. This practice, according to the OFAC, was endorsed and pushed by Binance’s then-chief compliance officer.

According to FinCEN’s order, the CCO wrote once to another employee at Binance, “We try to ask our US users to use VPN / or ask them to provide (if [they] are an entity) non-US documents / On the surface we cannot be seen to have US users but in reality, we should get them through other creative means.”

Binance consented to the appointment of an independent compliance monitor from the OFAC for five years. The Treasury Department also imposed a $150 million suspended fine against Binance that will be levied if Binance does not comply with the Treasury Department’s compliance program.

A Treasury Department release stated that “Binance was required to report suspicious transactions to FinCEN through suspicious activity reports (SARs). FinCEN’s investigation revealed that Binance’s former Chief Compliance Officer told personnel that the CEO’s policy was to not report such activity, and Binance never filed a single SAR with FinCEN.”

The statement continued, “Binance willfully failed to report well over 100,000 suspicious transactions that it processed as a result of its deficient controls, including transactions involving terrorist organizations, ransomware, child sexual exploitation material, frauds, and scams.”

The OFAC noted in its order that one employee of Binance noted in business communications that effectively blocking IPs for high-risk jurisdictions would be necessary to work with institutional and other large investors.

 

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