Products & Services February 15, 2024

Consultants Advise Plan Fiduciaries to Vet DC Annuity Offers

A proliferation of retirement income annuity offerings has ARC consultants citing ‘cause to question’ language that requires assessing annuity offerings for qualified plan participants.

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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.

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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.

Data & Research February 15, 2024

Labor Economist Takes Aim at ‘Working-Longer’ Culture

Teresa Ghilarducci discusses why her new book pushes back on working in old age as an answer to retirement insecurity.

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In her forthcoming book, “Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy,” labor economist Teresa Ghilarducci sets out to debunk the idea of an idyllic American labor market where people in their older years are happily working as baristas and retail store greeters to make ends meet.

“The idea that if people don’t have enough in retirement, they should just work longer only works for people with advanced skills or advanced college degrees,” Ghilarducci says. “It has to do with privilege in the labor market … and a little bit of luck. You have to remember the demand side of the equation.”

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Teresa Ghilarducci

Ghilarducci, director of the Schwartz Center for Economic Policy Analysis and the New School’s Retirement Equity Lab in New York, is a longtime agitator for a more centralized, government-driven retirement system. In a 2018 book, she worked with investment banker and former Blackstone Inc. executive Tony James to advocate for a guaranteed retirement account for all workers without a pension plan; more recently, she has backed a bill proposed in Congress, the Retirement Savings for America Act, that would create a federally sponsored retirement plan.

“Work, Retire, Repeat,” which comes out March 8, hits on some of those themes and policy agendas. But its core focus is on that “liminal, shadowy period” of working years from about 52 to 65. It’s this age, Ghilarducci argues, when American independence in retirement saving and planning meets with the system’s lack of a safety net, knowledge and adequate savings beyond Social Security for millions of people.

“The data spoke to me,” Ghilarducci says about the focus area for her book. “What I was seeing was that, if you don’t have a college degree or advanced skills, you may be permanently out of work at, say, 52 or 53—which hits people through no fault or choice of their own,” she says. “This is particularly bad for women. The age discrimination against women at all education levels is particularly a barrier.”

No Free Lunch

Ghilarducci argues in the book that, even if people want to work longer, employers often don’t want them, particularly if they do not have marketable skills—often the population most in need of additional income in older age.

“Most people are done with work, or their employers are done with them, around 67,” she says. “You see these stories about 90-year-old baristas exactly because they are rare. It’s like seeing a spotted snail or a dog dancing: It just doesn’t happen much.”

Ghilarducci believes American culture, including policymakers, has been lulled into the idea that the policy solution to retirement insecurity is simply to keep working. Known for calling the 401(k) retirement system an “experiment,” Ghilarducci echoes that sentiment in her book, calling the current defined contribution system a “do it yourself experiment” that prioritizes individual choice over a robust pension system.

“Working longer became a policy free-lunch solution that solved all sorts of problems,” she says. “It’s not practical, and it ignored the fact that there isn’t the demand for older workers.”

The first two sections of Ghilarducci’s book are focused on busting the myth that “working longer” is the solution to retirement insecurity, followed by detailed sections breaking down the cost—both economic and human—should the U.S. continue to rely on work as an answer to retirement income needs.

Many of the findings point to the disadvantage such a system will deliver to minorities and women, with data and examples building Ghilarducci’s case. She also delves into the current state of unions in the U.S., along with lower-income service jobs that often lack benefits, the Social Security system and Medicare.

Gray New Deal

In the final section, Ghilarducci turns to her solution for this near-retiree cohort, calling for a “Gray New Deal.” Many of the solutions are geared toward improving working options for older, “graying” workers, often backed by government programs. Ideas she lays out include:

  • Establish an Older Worker’s Bureau in the U.S. Department of Labor to focus on this age cohort and offer solutions and resources;
  • Expand health insurance to help older workers who are pushed out of the labor market, including lowering the qualifying age for Medicare and making it first-payer insurance;
  • Push employers to create better jobs through federal and state policies that “eliminate barriers to labor unions”;
  • Revamp training and job programs to make them “more worker-friendly”; and
  • Ensure better pensions, including ideas such as the guaranteed retirement accounts Ghilarducci advocated in her 2018 book and a federally backed, national individual retirement account based on the Federal Employees’ Thrift Savings Plan—a case she made in a 2021 white paper that backs the RSAA proposal.

Ghilarducci  notes that later this year she will be “on the hill” in Washington, D.C., to continue work on the RSAA proposal, which she says needs to be passed “for people in their 40s and 50s” who face uncertain retirements.

She will no doubt come up against detractors, many of whom have argued she is picking at a retirement system that is working for millions of people and is set to benefit from two major retirement reform initiatives passed in just the past five years. The professor and researcher has, in the past, been part of debates on these issues with the National Association of Plan Advisors, an advocacy group for the retirement plan industry that has been heavily involved in retirement reform.

Potentially more interesting will be how the RSAA, should it go forward, compares with another bill recently introduced, one widely backed by industry groups, including NAPA. That proposed bill, the Automatic IRA Act of 2024, would create a federal individual retirement account program requiring employers with more than 10 employees to enroll their workers into an IRA.

Ghilarducci, meanwhile, will forward her Gray New Deal.

“I believe that there are jobs that do have a shelf life; skills do become obsolete—and so do bodies,” she says. “Our system is built for our fantasy work life that people can maintain their employment up until 65. That is not the on-the-ground reality of the American labor market.”

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