Will Trump Administration Prove Friendlier to Retirement Plan Innovators?

After previously failing to get DOL approval for a target-date fund design that involves an annuity and reinsurance component, LGIMA hopes the Trump Administration will more readily allow such private sector innovations.

During a recent discussion on the topic of market volatility and pension plan trends, Jodan Ledford, head of client solutions and multi asset for Legal & General Investment Management America (LGIMA), shared that his firm has restarted work on an innovative new target-date fund (TDF) design.

In simple terms, the fund LGIMA hopes to roll out will be a TDF that features a built-in insurance component that will allow investors to “hit the easy button” to annuitize a given portion of their lump sum balance.

The fund would be supported, Ledford explains, by what is essentially a heat map that can be displayed in the participant’s investment portal. This heat map would show whether or not the current market conditions present a favorable or unfavorable annuity purchase window. According to Ledford, by having the embedded insurance component, plans could potentially save the participant somewhere in the ballpark of 8% to 10% of the cost of an annuity transaction. An advice component can also be linked into the TDF approach.  

Perhaps the most interesting feature of this architecture, Ledford says, is the fact that the target-date fund is being designed to own a reinsurance entity for the annuity provider. This arrangement would mean that the longevity profits the insurance company would make on the annuitized assets (and normally keep for itself) could instead be fed directly back to younger participants via dividends.

Not a New Idea

While Ledford is excited about this TDF design idea, he notes that it is, in fact, not new. LGIMA first brought this new TDF-annuity schematic to the Department of Labor (DOL) for approval about four years ago.

“When we went to the DOL some years ago, we told them we were trying to put a schematic together for a TDF that would effectively have a captive insurance capability inside of it. We explained that our goal is addressing the retirement income crisis,” Ledford says. “At that time, the response we got from DOL was actually quite skeptical. The DOL asked, where are you fleecing the participant in this complex product?”

According to Ledford, he and his colleagues emphasized their intention was, in fact, to help participants, and that LGIMA’s business incentive was to create a new product to solve a specific and critical marketplace need.

“In the end, they couldn’t get their heads around it,” Ledford says. “They kept trying to find where we were trying to take out double or triple fees on the participant.”

A More Responsive DOL?  

Fast-forward to 2019 and LGIMA is again working with outside counsel to readdress this new TDF framework.

“Encouragingly, we have gotten indications that the Trump Administration’s DOL is much more open to these kinds of discussions and innovations,” Ledford says, adding that he was not surprised to see the recent news that Nationwide has received a positive IRS private letter ruling. That ruling essentially conforms the tax treatment of properly structured advisory fees from non-qualified annuity contracts to those paid out of qualified accounts, which typically are not treated as taxable distributions.

According to Craig Hawley, head of Nationwide Advisory Solutions, that IRS ruling solves one of the biggest friction points that have held back many fiduciary advisers from the use of fee-based annuities. Hawley says he believes the ruling “opens the door to allow advisers to use these solutions in a much more significant fashion.”

Ledford agrees with that assessment, saying he is encouraged and hopeful that LGIMA will be allowed to move forward with much-needed innovations in the retirement income domain.

“Overall, the current Administration wants to promote market innovations, and I think they also realize there is a real retirement income crisis here,” Ledford says. “If we don’t allow private sector innovations to solve the retirement income challenge, we will end up with a very big social welfare risk on the backs of the taxpayers. From that perspective, too, I think the mood has changed.”

Beyond TDFs, Time to Focus on DC

While LGIMA predominantly works with pension plan clients, Ledford says, the business is shifting to think more about the defined contribution (DC) plan marketplace.

“In fact, we are bringing together some of the insurance and asset management capabilities into one standalone business unit that I will oversee,” Ledford explains. “Beside the new TDF, on the DC side, we are quickly moving towards the ability to be able to deliver a holistic and innovative post-retirement income framework. We’re trying to bring flexible income solutions for the first part of retirement—ages 65 to 80 or 85. These can be paired with in-plan deferred annuities that already enjoy the DOL’s approval, such as qualified longevity annuity contracts.”

Outside of the retirement plan context, LGIMA is looking at developing retail fixed annuities that, as Ledford puts it, “avoid all the nastiness of the variable markets, but still allow a premium to grow over a deferral period, such that it can outperform inflation.”

“The goal is that, by the time you commenced taking the annuity at a later life stage, your income power will remain what it was when you retired—or potentially even improve,” Ledford says. “We think this is a very innovative approach that could do a lot to help the majority of people who are facing retirement without a defined benefit pension plan.”