Consultants Advise Plan Fiduciaries to Vet DC Annuity Offers

With defined contribution annuity offerings proliferating in recent years among both providers and recordkeeper platforms, retirement plan advisers and sponsors must take a close look at the options to protect themselves and participants, according to recent commentary from an annuity consultancy.

Michelle Richter-Gordon and Mark Chamberlain, who started fee-only Annuity Research Consulting LLC last year, have held two live webinars this year with the goal of educating fiduciaries on the surge in annuity offerings as a pension-like retirement income option. The advice is linked to their firm’s services, but the pair note that they do not receive commissions from annuity sales.

Whether an annuity is being offered by a major recordkeeper via a managed account platform or within a DC-friendly investment product, plan fiduciaries still have an obligation to vet the offering, according to the duo.

Plan fiduciaries “have a duty to investigate the insurance firms,” says Richter-Gordon. “Just because a recordkeeper makes [an annuity] available does not [exempt it] from being a fiduciary decision. … The same logic applies that you are just as responsible for doing diligence.”

Cause to Question

The pair held a webinar on Wednesday titled “Cause to Question … Researching Safest Available Annuities.” During the webinar, Richter-Gordon said that a provision in the Setting Every Community Up for Retirement Enhancement Act of 2019 that creates a fiduciary safe harbor for the selection of lifetime income products must be carefully considered.

She noted that the ERISA 404(e) annuity safe harbor has seven criteria for offering an annuity to qualified plan participants, but in addition to those criteria, there is a stipulation that there is “no other information which would cause the fiduciary to question the representations provided.”

Both she and Chamberlain said there is almost always “cause to question” and carefully vet annuities offered by insurance carriers.

The event included Tom Gober, a consultant focused on annuities and the risks associated with including them in Employee Retirement Income Security Act retirement savings plans. Gober showed analysis that called into question the long-term liability of at least one unnamed insurance carrier, while detailing how a fiduciary might assess insurance carrier liability.

“You want your carrier to outlive your client,” Gober said, pointing fiduciaries to the annual statement for insurance carriers in which insurers list total surplus and liabilities. “The surplus is the only buffer between a viable insurer and an insurer in receivership.”

Gober, who noted he is a “champion” of the life and annuity industry generally, pointed out that the unnamed insurer had “skyrocketing premium growth,” coupled with “skyrocketing liabilities.” By comparison, Pacific Life, New York Life, TIAA and Nationwide Life were shown in the session as having reasonable liability-to-surplus levels.

Gober tied the unnamed company to something called modified coinsurance, or MODCO, a type of reinsurance in which two companies share risk. Through MODCO, the first insurer transfers the risk on a block of business while keeping the assets and reserves on its own balance sheet. Gober argued that when this is done on an offshore basis, the assuming company is often operating under generally accepted accounting principles, or GAAP, as opposed to statutory accounting principles, or SAP, which is used in the U.S.

GAAP reporting allows for an insurer to defer the sales costs of booking business with a new customer over many years—known as deferred acquisition costs—as opposed to booking them up front. The net effect of this reporting is that an insurer may claim to have full coverage of a liability in the offshore account, when in reality it’s not immediately available should it be needed.

“My concerns about being transparent and reporting truthfully are not if everything is going great into the future,” Gober explains. “My concern is that, if we have a stressful event like we did in 2008 and for whatever reason [the insurer] needs to get those funds back, that there’s going to be a hole, and potentially a very significant hole.”

He notes one example from his research that found an insurer noting $10 billion in coverage through an offshore reinsurer. In fact, for an immediate need, it was only covered for $7 billion, and another $3 billion was accounting for future assets that weren’t immediately accessible.

Annuity Options

Beyond managed accounts and out-of-plan annuity bidding options (such as Hueler Companies’ Income Solutions), some providers have come to market with investment vehicles that would defer some retirement savings into a guaranteed income annuity, including AllianceBernstein, TIAA’s Nuveen and Income America.

In January Fidelity Investments made headlines when it announced its Guaranteed Income Direct, a national 401(k)-to-income annuity offering. Currently, Fidelity’s platform offers options from MetLife, Pacific Life, Prudential Financial and Western & Southern Financial Group. The firm also noted that it provides digital resources and educational tool to participants to help them determine “the best path to take when it comes to retirement savings,” as well as access to licensed representatives.”

“The Guaranteed Income Direct platform also allows for flexibility and choice, so plan sponsors can select up to five insurers which gives the participant optionality when selecting which insurer they want to purchase from,” the firm wrote via emailed response about the offering. “Additionally, as a result of the SECURE Act, it is now easier for plan sponsors to offer annuities to their participants, as it includes a safe harbor intended to clarify plan sponsor requirements for evaluating the annuity providers.”

In-plan, insurance-based income options are just one tool in the quiver of plan sponsors. In fact, according to PLANSPONSOR’s most recent DC Benchmarking survey, systematic withdrawal plan options are the most popular retirement income solution, with 41% of respondents offering it to participants. In-plan managed account services are being offered by 26% of sponsors (with these services offering annuities), and insurance-based products are being offered by 6.7%, with 3.5% offering an out-of-plan annuity purchase or bidding offer to participants, according to the research. Another 51.3% said they offer no income-oriented products.

Update: This version is updated with a more detailed description of offshore liabilities for insurers.