Lifetime Income Hearing Witnesses Demand Fiduciary Shield

Numerous presenters at the two-day Washington, D.C., session sponsored jointly by the U.S Departments of Labor (DoL) and Treasury insisted that sponsors were concerned that, without detailed regulatory guidance, their eventual choice of a lifetime income option provider and their educational efforts could well land them in fiduciary hot water under the Employee Retirement Income Security Act (ERISA).

So, because provider selection and education will be more complex than in other retirement plan service areas, a number of the witnesses requested that the DoL’s Employee Benefits Security Administration (EBSA) and Treasury officials consider a variety of safe harbor protections.

“Under current law, the selection of an annuity provider is fraught with potential missteps that could result in continued liability for the plan sponsor well into the future,” said Janet Boyd, Director of Government Relations for The Dow Chemical Company, who appeared on behalf of the American Benefits Council. “To rectify this, plan sponsors need clear, simple fiduciary guidance allowing them to make lifetime income options available to plan participants without risking a significant increase in potential fiduciary liability.”

Most witnesses started by agreeing that a strong and comprehensive participant education effort would have to be mounted for a lifetime income option to be effective – or to be accepted at all.

“The individual comments in response to the (agencies request for information) RFI overwhelmingly expressed a lack of trust in service providers, employers/ plan sponsors, and the government as an administrator of lifetime income benefits,” declared Rebecca Davis, who offered testimony on behalf of the Pension Rights Center. “We believe that their fears are best addressed by ensuring that any implementation of a required annuity option in 401(k)-type plans be accompanied by a large public education campaign. The comments demonstrate a lack of understanding of the value of a lifetime stream of income.”

“It is our belief that these products often need to be sold to participants and clear education and communication is critical,” agreed Martin Schmidt, Chairman, Institutional Retirement Income Council, in his testimony.

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Safe Harbor Education? 

Nevertheless, of particular fiduciary liability concern, was exactly how plans would be forced to determine and provide educational materials detailing potential lifetime income streams and about the series of complex decisions participants have to make to set up their annuity account.

Some witnesses proposed the burden be shifted back to EBSA to provide sample education materials and that sponsors get safe harbor protections for simply providing the DoL materials to their employees.

“Many plan sponsors would also like to provide the tools necessary to help employees decide how to make their retirement savings last. However, there is concern that the plan sponsor may not be the best source for information on lifetime income products,” the U.S. Chamber of Commerce said in a statement presented for the hearing. “For example, many plan sponsors do not have sufficient information regarding individual retirement funding issues or various lifetime income options. Also, there is concern that becoming too involved in this area may increase an employer's fiduciary liabilities without providing an equal benefit in workforce productivity. For these reasons, the Chamber suggests that the DOL provide this information on its Web site or in materials that employers can provide to their employees. Moreover, plan sponsors and employers should not incur any fiduciary responsibility for providing to their employees information that was developed by DOL.”

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Educating about Fees  

Among the participant education-related issues raised was how the recent fee disclosure regulations should be changed to include disclosures on annuity product charges

In addition, Dan Campbell, Defined Contribution Administration Practice Leader at Hewitt Associates, argued participants will need a significant amount of fee data to make the best decisions. 

“We believe the DOL should clarify that the rules on fee disclosures to plan fiduciaries and plan participants should apply to all fees that could potentially arise in all phases of plan participation—whether it’s in the accumulation phase, decumulation phase or at distribution,” Campbell asserted. “For example, if a lifetime income option provides participants with choices throughout their lifetime, and additional or different fees could apply based on those choices, plan sponsors and participants should be made aware of all the possible fees that could apply with respect to the choices available throughout the usage of the product.”

Campbell specifically called for separate fee disclosures on a lifetime income product from those about investment management fees. “This unbundling of fees will give fiduciaries and participants a clearer picture of the true costs of the program,” he said. “It will also enable them to compare various lifetime income option providers and therefore facilitate competition, keeping costs down for plans and plan participants.”

Support for Adding Income Options  

Finally, most presenters agreed the basic underpinning of the hearings – the provision of lifetime income options to retirement plan participants – is a good thing.

“We encourage the DOL to encourage adoption of income solutions within plans or through plans to enable reduced sales and distribution charges and increased financial security for plan participants,” said Campbell. “Plan sponsors have a unique opportunity to influence the decisions of millions of Americans when it comes to lifetime income options. Additionally, they can leverage their size, scale and fiduciary prudence to deliver cost-effective solutions designed with the participants’ best interests in mind.”

For its part, Allianz, an annuity provider, offered that it “believes that plan participants (a) need access to education and guidance on retirement planning; (b) need the ability to purchase secure retirement products with principal guarantees; and (c) need to be able to easily convert a portion of their accumulated retirement assets into guaranteed lifetime income. “

A Contrarian Speaks  

Offering a contrarian view was Stephen P. Utkus, Principal, Vanguard Center for Retirement Research, who testified “we anticipate that a portfolio withdrawal program, not an income annuity, will be the dominant income strategy used by retiring plan participants.”

Utkus testified: “Most participants will want to remain invested throughout retirement, and will want to generate a significant part of their income using a withdrawal plan—a plan they establish on their own, with the help of a financial planner or adviser, or with the new generation of payout funds. This preference for a portfolio-based withdrawal plan reflects rational preferences for liquidity and flexibility, given the presence of a safety net from Social Security and other programs and assets.”

For further coverage of the hearings, see "Clear Messages Given at DoL/Treasury Hearings."

The written testimony offered for the hearing is available here.