Commenting on the passage seven weeks ago of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, Geoffrey Dietrich, executive vice president of the eponymous retirement plan insurance firm DIETRICH, says his view on the potential effect of the legislation differs somewhat from that of other analysts.
Many retirement industry observers have opined that the SECURE Act’s in-plan annuity selection safe harbor will have the biggest impact on participants. For his part, Dietrich also says that provision is important and will likely lead to the greater adoption of in-plan lifetime income products. However, he feels the SECURE Act’s related lifetime income disclosure requirement—which will see all plan participants supplied at least once per year with an estimate of what their lump sum balance would generate if converted today into a lifetime annuity—will drive the most significant results.
“The annuity selection safe harbor is significant, but, in my view, the mandatory disclosure of lifetime income projections on participant statements is what is going to shift the needle,” Dietrich says. “In fact, I think this disclosure provision will do potentially a lot more than the safe harbor to inspire use of annuities. I think the projections will wake up participants and cause them to change their mindset about things like annuities—moving from accumulation to decumulation mindsets.”
Simply put, many retirement plan participants think their lump sum savings will go a lot further in retirement than is actually the case. Seeing a paltry “retirement paycheck estimate,” Dietrich says, may shock a lot of participants into making greater contributions to their retirement accounts.
What Comes Next?
Dietrich notes that the SECURE Act gave the Department of Labor (DOL) 12 months to come up with a model framework that plan sponsors and providers will be able to use to make lifetime income disclosures. Given the inherent complexity of lifetime income projections, Dietrich says, it’s safe to assume the DOL is already hard at work on the project.
“The conversion assumptions are going to be the tricky part in all of this, and there is going to be continued debate and discussion about the best way to generate the projections,” Dietrich says. “Notably, under the law as it was passed, if a plan sponsor is following the projection rules eventually set forth by the DOL, they will not be liable for any differences, questions or changes that may come about based on the projection over time. In other words, they won’t be held liable if the projections turn out to be overly generous, for example. This is important because it’s not going to be immediately easy to get this right.”
Dietrich expects the income projection wrinkles to be smoothed out by 2022, by which time plan participants will start to grow more accustomed to thinking in terms of lifetime income.
A Word on the Annuity Safe Harbor
Turning to the in-plan annuity selection safe harbor, Dietrich warns that the SECURE Act has by no means created an annuity selection free-for-all. In order to qualify for the safe harbor, plan sponsors still must meet a number of strict criteria.
“The safe harbor requires an objective and careful fiduciary analysis at the time of the annuity product and insurance carrier selection,” he explains. “What the safe harbor does is insulate plan sponsors from liability that could arise down the road if circumstances change and an insurer becomes unable to meet its obligations, leading to losses for participants. In the present, the plan fiduciaries still must make a prudent, reasonable and well-considered decision that states they believe the insurance carrier and product will be able to meet their obligations indefinitely.”
And while the annuity selection safe harbor does not require plan sponsors to choose the cheapest option available, it does require a thorough analysis of the cost of any annuity contract relative to the benefit—to ensure it is priced reasonably.
“There are other obligations that plan fiduciaries should carefully consider,” Dietrich says. “The sponsor must ensure the insurer maintains sufficient reserves, for example, and make sure that the insurer is reviewed regularly by the relevant state regulator.”