ERISA Council Signals More Work Needed for Retirement Income Products in QDIA

The Department of Labor’s Advisory Council on Employee Welfare and Pension Benefit Plans, also known as the ERISA Advisory Council, on Thursday held the final discussion in this week’s series centered on retirement income products and their place within qualified default investment alternatives.

Members debated the complexities of integrating lifetime income options into retirement plans and the broader implications for plan sponsors and participants amid the changing retirement landscape. One member expressed concern that participants that are defaulted into target date solutions that include an income component may pay for a benefit that they do not put to use. 

In response,  Alice Palmer, the vice president and retirement plan service chief counsel for the Lincoln Financial Group, highlighted testimony from executives at RTX Corp., which implemented an in-plan guaranteed income solution for employees. Those executives drew attention to the comparability of retirement income target date product performance with that of S&P Index TDFs.

Palmer reminded the council that the actuaries at RTX highlighted the comparison because fund managers that are managing target date solutions with a guaranteed income component—in part because of the guarantee—are able to more aggressively allocate the other target date assets closer to retirement. Consequently, she said, net performance can be very similar to that of a standard index TD fund.  

“Whether your money is in a Vanguard fund, or whether your money is in target date solution with a guaranteed income component, what that translates to, if liquidated early or in retirement, depending on the product, can be equivalent,” she said.

Beth Halberstadt, a senior partner in and the U.S. defined contribution investment leader at Aon, echoed Palmer’s concerns, agreeing that there is a significant opportunity for more guidance on retirement and lifetime income options within qualified plans. She stressed that the current regulatory framework, particularly Section 404(c) of ERISA, does not provide detailed guidance on how fiduciaries should assess or select these products.

“When we think about the rules that we have today, 404(c) is pretty high level,” Halberstadt said. “It doesn’t go into telling fiduciaries how to assess, how to pick, how to select.”

However, Halberstadt cautioned the group against letting perfection hinder progress, encouraging incremental steps toward improving available guidance. She also called for a balanced approach that fosters creativity while mitigating litigation risks.

“We know we don’t want to stifle innovation,” she says. “We’re already struggling in the DC space with innovation and litigation and trying to strike that right balance.”

Another key voice, Holly Verdeyen, a partner in and the U.S. defined contribution leader at Mercer, raised questions about the council’s focus. She noted that much of the testimony and discussion centered on the lifetime income component, despite the council’s original mandate to examine QDIAs as a whole.

Verdeyen emphasized the importance of determining how much of the final report should address the current state of QDIAs, suggesting that the conversation may have drifted too far into lifetime income products. Halberstadt agreed, but noted that foundational reports, such as those from Morningstar and Vanguard, could help address the gaps in testimony and provide a more complete picture.

In its future work, the council intends to further evaluate how lifetime income products can be integrated into QDIAs and how these decisions will impact plan sponsors’ fiduciary responsibilities. It will continue to focus on balancing innovation with the need for clear guidance, ensuring that retirees’ financial security is maintained across various product offerings, according to concluding statements from the advisory made Thursday.

Update: This story has been updated with additional commentary for context regarding TDFs with retirement income components.