Attorneys Say Guaranteed Income Safe Harbor Clearer Than Previous Guidance

During a webinar sponsored by Faegre Drinker called “The SECURE Act: A Discussion of the Safe Harbor for Selecting Guaranteed Income,” ERISA [Employee Retirement Income Security Act] attorneys from the law firm spoke about how the legislation could pave the way for retirement plans to offer guaranteed products—but also aspects of the bill that could be a concern for sponsors and advisers.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act has a checklist of factors sponsors should consider when selecting an insurance carrier to offer a guaranteed lifetime income product, said Bruce Ashton, a partner with the Employee Benefits and Executive Compensation Practice Group at Faegre Drinker. Ashton said he expects that insurance carriers will have this information ready for any prospective customer.

The information covers such things as “[if] they are licensed to offer guaranteed income products; that at the time of the selection of the product and in the immediate years following, it operates under a certificate of authority in the state where it is located; that it has filed all of its audited statements; that it has all of the required reserves; and that it is not operating under an order of liquidation,” Ashton said.

In addition, the carrier must undergo an examination by its state insurance commission at least every five years, he continued. “And they must ensure that they will notify plan sponsors of any changes in these representations,” Ashton said.

In addition to this, plan sponsors are required to attest that “after receiving these representations from the insurance company and before making any decision with respect to selecting a contract, that they have not received any adverse notice to suggest the representations are not true,” Ashton said.

These representations relieve plan sponsors from having to “delve into the financial status” of a carrier, he said.

The best way for sponsors to assess this information is with the help of a retirement plan adviser specialist, Ashton said.

This checklist should be a relief to plan sponsors that want to offer guaranteed income products because it provides real clarity on how to assess carriers, said Brad Campbell, a partner with Faegre Drinker. “The safe harbor that the DOL [Department of Labor] issued on guaranteed income products in 2008 to sponsors was, ultimately, not useful because it was too difficult for them to know if they were within the conditions that needed to be met to know that the carrier would be able to carry out the contract,” Campbell said. “The DOL received a long series of complaints that this safe harbor was too nebulous and did not enumerate who to hire to assess a carrier’s solvency.”

On top of this, when the financial crisis of 2008 occurred, “the validity of the rating agencies was called into question,” Campbell continued. The SECURE Act “provides clarity,” he said.

However, Ashton said, before asking for the checklist from a prospective carrier, sponsors first need to investigate the various carriers and products in the market.

In addition to concentrating on the marketplace overall and the solvency of the carrier, sponsors and advisers must find a product that has a reasonable cost, Campbell said. The best way to get a good handle on costs is to issue requests for proposals (RFPs) to seven to eight carriers, he suggested. As with all other fiduciary decisions related to a retirement plan, the key is to “show a process and document it,” Campbell added. In his experience, guarantees wrapped around target-date or balanced funds range from 60 to 100 basis points.

Besides RFPs, “benchmarking reports will be an important element of comparing the different costs in relation to product features and services,” Ashton said. “GMWB [guaranteed minimum withdrawal benefit] products all have different features. It is important not only to look at the cost but what you are getting for that cost, which is where a benchmarking service would be extremely useful for advisers.”

Sponsors and advisers should also be comforted with the added assurance that recordkeepers, in the interest of protecting their own companies and brands, will perform due diligence on insurance carriers on their own, said Fred Reish, a partner and chairman of the Financial Services ERISA Team at Faegre Drinker.

And the SECURE Act is not the final answer on offering guaranteed lifetime income products in retirement plans, Campbell said. As new products and solutions come to market, this will “put pressure on DOL and other regulators to allow QDIAs [qualified default investment alternatives] to accommodate these products.”

As to whether the SECURE Act will result in retirement plans offering in-plan annuities and other guaranteed lifetime income products, Ashton said he expects that will eventually happen, but in the near term, both sponsors and participants will need to be sold on the idea of owning an annuity.

Josh Waldbeser, a partner with Faegre Drinker, agreed, saying, “It’s a step in the right direction, but there is still a lot of work to be done. There is still a lot of mistrust of annuities and insurance companies and a lack of understanding of their benefits, among sponsors and participants.”

Ashton said that to get sponsors and participants on board, it will take first convincing advisers of the benefits of annuities, since they are “the gateways to retirement plan committees. If I were in the insurance industry and I had a really good product that was high quality and institutionally well-priced, I would spend time now educating retirement plan advisers about these benefits.”