Compliance February 6, 2020

SECURE Act Is No Lifetime Income Free-For-All

One analyst argues the landmark legislation’s lifetime income disclosure requirement may prove to be more influential than the annuity selection safe harbor.

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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.

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“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.”

Products February 6, 2020

Investment Product and Service Launches

IHS Markit adds MSCI ESG ratings and HarbourVest offers private equity with Vanguard.

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Art by Jackson Epstein

Art by Jackson Epstein

IHS Markit Adds MSCI ESG Rating

IHS Markit has collaborated with MSCI to enable MSCI’s environmental, social and governance (ESG) ratings and research data to be applied in the broad range of fixed income and credit indices from IHS Markit.

“Investors have a growing appetite for exposure to ESG funds, creating a need for indices that integrate these principles while accurately representing the underlying market and continuing to deliver strong returns,” says Sophia Dancygier, head of indices at IHS Markit. “In recognizing the importance of sustainable investing and following the successful launch of our Global Carbon Index, we are excited to collaborate with MSCI as we expand our ESG coverage in iBoxx and iTraxx indices.”

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“As investors continue to evaluate opportunities to incorporate ESG considerations into their portfolios, we are pleased to be working with IHS Markit to apply MSCI’s ESG ratings and research data to their suite of fixed income and credit indices,” says Eric Moen, head of ESG products for MSCI ESG Research. “MSCI ESG Research covers 650,000 equity and fixed income securities globally, which provides quality insights into ESG risks and opportunities within multi-asset class portfolios.”

As a first phase of the collaboration, IHS Markit has launched sustainability-focused iBoxx MSCI short maturity corporate bond indices in three currencies (EUR, USD, GBP). The new iBoxx MSCI ESG indices exclude issuers in business lines or activities defined by MSCI ESG business involvement screens. Inclusion in the indices is also restricted to issuers with MSCI ESG ratings of BBB and above, and those in compliance with the United Nations Global Compact principles, which demonstrates a quantified commitment to ESG standards in operations, products and services.

HarbourVest Offers Private Equity with Vanguard

Vanguard and HarbourVest have partnered to provide qualified investors with access to private equity.

“We are entering the private equity market the Vanguard way—partnering with a world-class adviser to provide a high-quality offer,” says Vanguard CEO Tim Buckley. “Private equity will complement our leading index and actively-managed funds, as we seek to broaden access to this asset class and improve client outcomes. While this strategy will be initially available to institutional advised clients, we aim to expand access to investors in additional channels over time. For individual investors in particular, this partnership will present an incredible opportunity—access and terms they could not get on their own.”

The new private equity strategy initially will be provided by Vanguard Institutional Advisory Services to pensions, endowments and foundations, as part of an ongoing effort to further expand the suite of products for those clients. In keeping with its enterprise-wide focus on advice, Vanguard has invested considerably in its advisory services for a broad range of investors, including outsourced chief investment officer (OCIO) capabilities. 

“Many institutional clients seek alpha sources not readily available in the public markets,” says Chris Philips, head of Vanguard Institutional Advisory Services.  “While these organizations may want exposure to the opportunities available in the private markets, it can be challenging to access leading private equity managers and invest with discipline and skill. Through this partnership, Vanguard’s portfolio construction and investment committee governance capabilities will be complemented with HarbourVest’s private market expertise, to the ultimate benefit of our clients.”

Transamerica Launches Emerging Markets Opportunities Fund

Transamerica has launched the Transamerica Emerging Markets Opportunities fund, now available to retail and institutional investors.

Transamerica selected Wellington Management Company LLP to sub-advise the fund.

Transamerica Emerging Markets Opportunities (NASDAQ: TEOIX) fund offers investors a diversified approach to investing in a global emerging market portfolio of stocks with market capitalizations in excess of $3.5 billion. Portfolio allocations are generally expected to align closely with the sector weights of the MSCI Emerging Markets Index.

Northern Trust Automates Processing for Bank Loan Trading

Northern Trust has automated processing of the full trade settlement lifecycle for syndicated bank loans through integration with IHS Markit’s ClearPar Custodian Services Messaging capability. Designed to deliver trade data in a standardized format via secured communications, this service increases scalability and efficiency while reducing the risks inherent in a manual trade settlement process.

The new solution enables Northern Trust to map critical trade and funding information seamlessly into its proprietary bank loan servicing platform, thereby providing digital access to all parties in a transaction. Key transaction data, including settlement date, settlement amounts and wire instructions is streamlined and communicated electronically, allowing Northern Trust to seamlessly accommodate the triple digit trade volume increase it has experienced in the last five years.

“Syndicated loans are an increasingly important asset class for our institutional investors and family offices seeking higher yields. Integration with trade platforms such as ClearPar removes the potential for latency in the process and demonstrates our commitment to delivering timely and accurate daily data to our clients across the globe,” says Pete Cherecwich, president of Corporate and Institutional Services, Northern Trust. “Our work with IHS Markit to automate trade and payment information not only drives efficiency but enhances risk management. This integration raises the bar in complex asset processing—it is a major advance for Northern Trust and the syndicated loans market and will deliver tangible benefits to our clients.”

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