The Markets June 12, 2017

PSNC 2017: New Solutions Needed to Address Plan Sponsors' Lifetime Income Fears

Speakers at the 2017 PLANSPONSOR National Conference said changes may be coming to spur more creative lifetime income products and solutions for retirement plans.
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At the start of the 2017 PLANSPONSOR National Conference panel on Retirement Income Products and Solutions, Barbara Delaney, principal, StoneStreet Advisor Group, and moderator of the panel, shared a chart showing that the ability to make sound financial decisions starts to decline at age 49 and precipitously declines through age 75. “We need to get people to make retirement income decisions while working,” she stressed.

However, defined contribution (DC) plan sponsors have been slow to adopt guaranteed income products for their plans. John Doyle, senior vice president, defined contribution strategist at American Funds from Capital Group, noted that the concern over fiduciary liability has been the biggest roadblock to adopting retirement income products or solutions. “Plan sponsors say, ‘We’re not supposed to be talking about guaranteed or insured products,’” he said. Plan sponsors are also worried about portability, he added. They worry that the solution will be stuck in the plan and the plan sponsor will be stuck with the recordkeeper. “It could put handcuffs on the plan sponsor and handcuffs on participants. The solution may be to have out-of-plan options available,” Doyle said.

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Marty Menin, director – Retirement Solutions Division at Pacific Life Insurance Company, said another issue is complexity. If you think of all the different versions of retirement income—guaranteed minimum withdrawal benefits (GMWBs), qualified longevity annuity contracts (QLACs), regular annuities—there are some complex choices, but those of us in insurance industry are working on these things,” he said. “Plan sponsors have to understand them, then have to teach employees about how they work. As the industry adds solutions and builds them, we imagine all the different things plan sponsors and participants have to understand and communicate.”

Bruce Lanser, senior retirement plan consultant at UBS Retirement Plan Consulting Group, noted that 30% of its clients have adopted GMWBs as an in-plan solution. “They are aware of the added responsibility and speedbumps such as portability, but they have the view that this is too important,” he said. Lanser explained that a GMWB is something somewhat simple for participants to grasp. Participants in defined benefit (DB) plans didn’t know interest rates and investment allocation, but they knew what they would get in retirement, and this is the same with a GMWB. Participants know they will have a benefit of ‘x’ amount if retire in year ‘z’.

A plan sponsor in the audience shared that it took a different approach because it didn’t want an investment in the plan. The plan sponsor partnered with Financial Engines to offer its Income Plus product. It is not so much a guarantee, but Financial Engines works with participants on a draw down rate and the purchase of an annuity at age 80.

NEXT: Changes coming due to DOL fiduciary rule

Lanser said their once was a concern about keeping participants in a DC plan for 20 or 30 years after being employed, but now there is a trend of plan sponsors wanting to keep the money in plan. The plan assets will grow and help in negotiating lower fees. There’s been a changing mindset.

Doyle expects that when the full fiduciary rule goes into effect, more people will stay in the plan whether they want to or not. But he warns that if a participant doesn’t feel they can handle finances in retirement and the employer doesn’t help, they may continue to work longer, which raises health care costs and lowers productivity for employers. “It makes a difference to the bottom line if you can help them retire and that includes helping them be comfortable with being able to have an income stream in retirement,” he told conference attendees.

If participants keep their assets in the plan, maybe that will be the catalyst for someone to come up with a product for in-plan guaranteed income, Doyle speculated. “If participants stay in the plan and the plan is designed for accumulation up to age 65, plan sponsors are not doing their fiduciary duty for all participants, i.e. those who are terminated,” he said.

He added, “I don’t think at any time in the near future it will be required to offer guaranteed income in the plan. One reason is the portability issue. Secondly, government mandates have not necessarily been proven to be taken well by employers. We’ve seen that with health care.”

NEXT: Innovative ideas

Menin said he is not sure there are any new and creative ideas for retirement income products and solutions, and the retirement plan industry needs new, creative ideas over the next few years. But, people don’t understand some options already available. For example, he explained, one fear participants have of annuities is if they get hit by a bus, they will lose the rest of their annuity. There are options such as a 20-year certain annuity, but no one understands that. “Participants want guaranteed lifetime income, but not annuities, so a gap exists between what people want and what the industry is offering. There is no collaborative effort between industry and individuals,” he said.

The Internal Revenue Service (IRS) has issued regulations allowing for retirement income products to be included in target-date funds. “I think if they have guarantees in TDFs, the plan sponsor assumes they are defaulting participants into guarantees,” Doyle said. “Where I see guarantees coming into TDFs is as an option for participants, but we’ve seen that when something is voluntary, people don’t use it. That is where it is important for advice and education.” He added that managed accounts and packaged products will start to meet people’s needs.

Lanser noted that if plan sponsors default participants to a GMWB 10 years before the end of the TDF end date, it changes behavior. Participants save more in the plan. In addition, he said, research shows participants are 3.5 times more likely to stay in investments during market downturn when they have a guarantee. They don’t do things that would be destructive to their savings.

Doyle suggested a change in terminology from ‘retirement savings plan’ to ‘retirement income plan’ to change participants’ mindset. And, Lansing suggested that plan sponsors need details about guarantees and what is backing them in order to monitor the investments, but with participants, they can simply explain what the product translates into for retirement income.

Compliance June 12, 2017

PSNC 2017: Final Fiduciary Rule Not So Final

Speaking at the 2017 PLANPSONSOR National Conference, a staffer at the DOL told attendees the agency is still looking for ways to make its fiduciary rule better.
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The Department of Labor (DOL)’s fiduciary rule, now in effect, is still likely not the final rule.

That’s according to Timothy D. Hauser, deputy assistant secretary for Program Operations of the DOL’s Employee Benefits Security Administration (EBSA), who spoke to attendees of the 2017 PLANSPONSOR National Conference.

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Hauser noted that the EBSA is working on many initiatives, but chose to spend his time speaking about the DOL rule because “that’s what everyone cares about.” The rule went into effect at the stroke of midnight the night of June 9. Hauser said that was intentionally to give advisers, broker-dealers and other providers the weekend to make sure system changes were operable.

In the version of the rule now in effect, Hauser said, exemptions will be applicable—the best interest contract exemption (BICE) and the prohibited transaction exemption (PTE). The only additional requirements is prudence and loyalty, which means not charging unreasonable compensation and not being misleading in communications.

Hauser said the DOL embarked on this initiative because it felt it needed to revisit the 1975 rule in view of market changes. “The five-part test in that rule meant many fewer people were fiduciaries than the statute suggested, so we went back to a more broad definition,” he told attendees.

NEXT: The need for rule changes

In 1975, the retirement industry was dominated by defined benefit (DB) plans managed by professional investment managers. Now, it is dominated by a defined contribution (DC) system managed by individuals. “There has been a move away from advice from professional money managers to advice to individual consumers who do not have expertise,” Hauser pointed out.

In addition, he said, the marketplace for advice is very conflicted. “There are many conflicts of interest, and the DOL was concerned that conflicts were affecting investment advice people receive,” Hauser said. “The previous administration thought there was market failure and people were losing billions.”

The final rule was supposed to go into effect in April. But in February, Trump issued a memorandum asking the DOL to take a hard look at whether the rule could have an impact on people’s access to advice or certain financial products, whether it could disrupt the market, and whether the regulation would cost consumers to their detriment.

In response, the DOL extended the applicability date and asked for additional input. Hauser said the EBSA has gone through those comments, and is looking at an impact analysis. The extension delays most exemptions except for impartial conduct standards (not charging unreasonable compensation and not being misleading in communications.). “We felt enough time had gone by that people should be able to comply with those standards and those would take care of most concerns,” he said.

“The way the exemptions are structured, service providers can sell or make recommendations on a commission or fee basis. The rule is agnostic about the way they are compensated. They can sell annuities and can sell mutual funds and receive front end load and commissions, but will be subject to impartial conduct standards,” he added.

NEXT: More changes to come to the rule

Hauser told attendees the DOL put aside other provisions of its rule until after its analysis. He said there may be changes after the analysis. The effective date of most conditions are moved back to January 2018, and it’s possible the DOL will move other provisions to later than that, particularly if it decides to issue another streamlined exemption or alter terms of current exemptions so providers don’t have to engage in new system builds, if it decides there are better approaches.

Hauser said the EBSA has also sent a Request for Information on Fiduciary Rule and Prohibited Transaction Exemptions for Office of Management and Budget (OMB) approval. “This reflects the fact that we want to move forward on two tracks; at the same time we are doing an analysis of issues brought up by Trump and new points of view people expressed, we are thinking about other possible exemptions that may be more streamlined and build upon changes we’ve seen in marketplace that came from impact of this rule—developments in new share classes, development of tools to help people make rollover decisions,” he told attendees.

Hauser noted the biggest issue, and what seems to be the biggest source of controversy, is the best interest contract requirement. The contract tells individuals that the adviser or provider is a fiduciary and offers a warranty. “One thing in the request for information is a set of questions asking people what effective substitute would be for contractual rights,” he said.

“Obviously, the availability of a contract can incent litigation, but it also incents fiduciary behavior,” Hauser added. “We realize it is a major rule. The expectation is we’ll be working with firms and people trying to comply in good faith to help them; we’re not looking to litigating them.”

NEXT: The impact on plan sponsors

Much of the media coverage of the DOL fiduciary rule focuses on what it means for adviser, broker-dealers and providers, but there is also an effect on plan sponsors.

The most important thing for plan sponsors, according to Hauser, is to check contracts to make sure service providers are acting in a fiduciary capacity and make a conscious decision in that regard. Especially for large plan sponsors, the rule lets them decide if they want certain communications to be fiduciary advice.

If advice given to plan participants is for a fee, it is fiduciary advice. But, plan sponsors don’t have to worry about their own employees giving advice if their jobs don’t include that; their own employees are not treated as fiduciaries if answering participant questions.

However, if the recordkeeper is getting compensated and making investment recommendations, it is a fiduciary

Interpretive advice plan sponsors have been using to avoid crossing the line between education and advice appears mostly in the new rule, which also added new language, Hauser said. For example, it is not fiduciary advice to tell people to add more savings—e.g., a good rule of thumb is to save this much, or they shouldn’t leave match money on the table

There is also new language about education about investments. The DOL is looking at more ways to communicate the difference between advice and education.

“I can’t say what is coming going forward, but we do have the authority to make rules that apply to all types of money going into retirement plans,” Hauser said. He added that even if the Securities and Exchange Commission offers some differing advice standards, there may be different consequences, but there are lots of ways to converge the SEC and DOL provisions.

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