Plan Sponsors Worry About Explaining Income Solutions to Participants

The complexity of explaining retirement income solutions to participants was one of several reasons defined contribution plan sponsors cited for not offering these options in their plans.

Several studies have shown that a growing number of Americans fear running out of money in retirement and many have dismal views on the future of Social Security, making the prospect of retirement income solutions more appealing. However, plan sponsors are facing specific challenges when it comes to implementing these options.

Although 64% of plan sponsors consider it a priority to implement retirement income solutions into their plans, only 16% have done so, according to a recent survey conducted by Corporate Insight in conjunction with the Institutional Investor Institute for Defined Contribution.

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Corporate Insight reported that one of the biggest revelations it made following the study was the lack of communication between plan sponsors and retirement plan participants. Only 4% of plan sponsors said they have surveyed their participants to gauge their interest in retirement income solutions. Out of those with retirement income options already in place, only about 8% said they would do so.

In addition, the survey found that a portion of respondents believe these investment vehicles are too complicated to explain to participants, further hindering these plan sponsors from adding retirement income solutions to the funds menu.

Among the concerns about implementing these options, plan sponsors cited a lack of one-size-fits-all choices (28%), a high cost on participants (19%), waiting on in-plan safe harbor before moving forward (16%), and the complexity of explaining retirement income solutions to participants (15%).

The survey also found that many plan sponsors have trouble deciding the best course of action to take when implementing income solutions. According to Corporate Insight, “Survey results indicate in-plan solutions (41%) and a combo of in-plan and out-of-plan solutions (35%) are the most desirable. Out-of-plan solutions alone (14%) are highly undesirable, but plans with an asset size of more than $10 billion strongly prefer them (31%). Those currently with a retirement income solution in place more frequently considered in-plan solutions (55%).”

Plan sponsors also have mixed reactions when it comes to investment options. The most popular option was managed accounts with a payout option cited by 55% of respondents. The remaining choices each were cited by 18% of respondents: in-plan annuity with no guarantee, out-of-plan solution, a combination in-plan and out-of-plan solution, and other.

The 2015 PLANSPONSOR Defined Contribution Survey found that “when it comes to annuities or income products that guarantee income, nearly one in six defined contribution plans (58.6%) offer no type of income product. A mere 6.9% of DC plans offer in-plan income products that guarantee monthly income. Further, only 3.5% of plans offer an out-of-plan annuity purchase/bidding service. However, out-of-plan annuity purchase/bidding services are offered by 15.5% of mega plans.”

For more information about Corporate Insight’s survey, visit the Corporate Insight blog.

 

Verizon Pension Buyout Lawsuit Dismissed for Second Time

The case had been remanded back to the appellate court after the Supreme Court's decision in Spokeo, Inc.v. Robins.

The 5th U.S. Circuit Court of Appeals has reaffirmed its previous dismissal of a class-action lawsuit that arose from the decision by Verizon Communications in October 2012 to purchase a single premium group annuity contract from The Prudential Insurance Company of America to settle approximately $7.4 billion of Verizon’s pension plan liabilities.

The case includes two classes of pension plan participants: those whose benefit liabilities were transferred to Prudential and those whose liabilities remained in the plan. The appellate court agreed with the dismissal of claims of the non-transferee class by a district court because the class did not prove individual harm and, therefore, lacked standing to sue.

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Its affirmance was driven, in part, by the determination that plaintiff-appellant Edward Pundt lacked Article III standing to sue for purported fiduciary misconduct pursuant to the Employee Retirement Income Security Act (ERISA). Specifically, the 5th Circuit previously held that “standing for defined-benefit plan participants requires imminent risk of default by the plan, such that the participant’s benefits are adversely affected,” and it noted that Pundt failed to “allege the realization of risks which would create a likelihood of direct injury to participants’ benefits” in this case. The court also rejected Pundt’s argument that “he directly suffered constitutionally cognizable injury through invasion of his . . . statutory rights [under ERISA] to proper [p]lan management,” concluding that standing based on invasion of a statutory right must still “aris[e] from de facto injury, which is not alleged by a breach of fiduciary duty.”

Pundt then filed a petition for writ of certiorari in the United States Supreme Court. Subsequently, the Supreme Court decided Spokeo, Inc. v. Robins, which clarified the relationship between concrete harm and statutory violations for purposes of assessing Article III standing. After deciding Spokeo, the Supreme Court granted Pundt’s petition for writ of certiorari, vacated the appellate court’s judgment in the case, and remanded the case for further consideration in light of Spokeo.

NEXT: Reviewing the Verizon case in light of Spokeo

In its new opinion, the appellate court noted that the Supreme Court reaffirmed in Spokeo that violation of a procedural right granted by statute may in some circumstances be a sufficiently concrete, albeit intangible, harm to constitute injury-in-fact without an allegation of “any additional harm beyond the one Congress has identified.” However, the Supreme Court also took care to note that “Congress’[s] role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.” Rather, “Article III standing requires a concrete injury even in the context of a statutory violation.”

In Spokeo, the Supreme Court held that a bare allegation of a Fair Credit Reporting Act violation based on inaccurate reporting of consumer information was insufficient to establish injury-in-fact, as “not all inaccuracies cause harm or present any material risk of harm.” In the same way, the 5th Circuit recognized that Pundt’s allegation of an “invasion of [a] statutory right[] to proper [p]lan management” under ERISA was not alone sufficient to create standing where there was no allegation of a real risk that Pundt’s defined-benefit-plan payments would be affected.

In short, because Pundt’s “concrete interest” in the plan—his right to payment—was not alleged to be at risk from the purported statutory deprivation, Pundt had not suffered an injury that was sufficiently “concrete” to confer standing. “A bare allegation of improper defined-benefit-plan management under ERISA, without concomitant allegations that any defined benefits are even potentially at risk, does not meet the dictates of Article III; concluding otherwise would vitiate the Supreme Court’s explicit pronouncement that ‘Article III standing requires a concrete injury even in the context of a statutory violation,’” the appellate court wrote.

It reinstated and published its prior opinion.

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