Compliance September 17, 2013

Would Income Projections Show a Better Way?

The Department of Labor (DOL) wants to know whether its proposal to show lifetime income projections on retirement plan participant statements is a solution to having inadequate income in retirement.
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According to Assistant Secretary of Labor Phyllis Borzi, with the DOL’s Employee Benefit Security Administration (EBSA), research shows if defined contribution (DC) plan participants are offered cash, they will take it. She told attendees at the Plan Sponsor Council of America’s (PSCA’s) 66th Annual Conference that the agency wants to show participants they have a choice to create a lifetime income stream in retirement.

Borzi explained that regulators do an advanced notice of proposed rulemaking (see “DOL Extends Lifetime Income Comment Period”) when they think there is a problem and are not sure a regulation will be a solution. She said the agency wanted to know from commenters if there is a problem with participants understanding the option of creating a lifetime income stream and what the solution would be.

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From the 120 comments received, the EBSA learned three lessons, according to Borzi:

  • The DOL needs to be clearer about what constitutes investment education versus advice;
  • There is a need to educate people about the importance of lifetime income; and
  • Plan sponsors are troubled by potential fiduciary liability from including income projections on participant statements, especially if participants interpret it as a guarantee.

 

“We heard loud and clear that we need to clarify sponsors fiduciary responsibility when including lifetime income on statements,” Borzi said.

She added that many commenters were concerned about the DOL making the inclusion of lifetime income projections mandatory for plan sponsors. “It is currently voluntary, so I don’t understand how leaving it that way will change things,” Borzi stated. Commenters said if it is required, there must be clear parameters, but some worried this would stifle innovation (see “Industry Leaders to DOL: Don’t Stifle Innovation”).

Borzi said the most disagreement among commenters was about what to show—how participants’ balances translate to monthly income in current dollars or projected dollars (see “Safe Harbor is Topic of Lifetime Income Comments”). However, there was near unanimous agreement that lifetime income illustrations are a good way to educate participants.

The Markets September 17, 2013

PANC 2013: Retirement Income

As the American demographic is approaching retirement—many without adequate savings—the discussion of the role of retirement income products has ramped up.
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Kevin McGarry, director of the Nationwide Institute at Nationwide Financial, told attendees of the 2013 PLANADVISER National Conference that its research shows only 22% of Americans feel prepared for retirement, but retirement income solutions can help bring up this number.

Glenn Dial, head of U.S. Retirement at Allianz Global Distributors, added that guaranteed products, such as income solutions or annuities, are the only way to insure against longevity risk. He pointed out that the marketplace built an infrastructure before the retirement industry started to consider the use of such products for retirement plan participants, but both in-plan and out-of-plan solutions have issues. For out-of-plan solutions, where participants purchase a guaranteed product at the time of retirement, the biggest risk is interest rate or transition risk—whether the value of the purchase will equal the value of assets being used for the purchase. In-plan solutions still present portability and cost issues.

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Timothy Walsh, managing director for the Institutional Product business at TIAA-CREF, said portable solutions are emerging as providers recognize the need for plan-level portability, but if participants are able to move the product from plan to plan, yield will suffer. When considering an in-plan solution, plan sponsors should ask if it is better to give up portability to maximize participants’ yields.

McGarry noted that retirement income strategies for participants not only include the use of variable or immediate annuities, but can include traditional systematic withdrawals of their accounts as well as life insurance and long-term care insurance.

According to Walsh, no one solution fits everyone’s needs. Individuals have unique financial scenarios when they retire, so aside from retirement income products, participants need one-on-one advice. McGarry agreed that participants need to have a full retirement income plan in place as they approach retirement; it may include retirement income products, but it could be a combination of strategies.

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