Defined Contribution (DC) plans like 401(k)s and 403(b)s have passed the retirement decisions and liability onto employees. And while the “ideal plan” offers an opportunity for workers to solve the first two of three hurdles they have to face (saving enough and investing wisely), it does not solve for the 3rd problem –outliving their savings. Retirement income is designed to solve this last problem but the solutions are still under development.
In DCIIA’s (Defined Contribution Institutional Investment Association) recently released white paper, the issues and case studies of larger plans what have found some success are reviewed. 401kTV will cover how some of these solutions can help smaller companies.
First let’s start with why a company should even consider offering retirement income solutions. Not only are workers better prepared for retirement more productive, they will actually feel confident making the decision to retire. If not, they keep working when their “hearts, hands and minds” are not fully engaged resulting in higher healthcare and disability costs, higher absenteeism and lower productivity and morale from younger workers. On the positive side, a retirement income solution will attract better workers and help retain key employees.
One hurdle is liability – if a company picks a vendor to supply retirement income and that vendor defaults, is the company liable even if they conducted all reasonable due diligence? If investments within a DC go south, plan sponsors are protected with proper due diligence. So many companies are waiting for safe harbor rules from the DOL which is making positive steps in that direction. Follow the timeline in the DCIIA white paper below and you will see that retirement income is certainly on their radar. It will likely have to wait until the fiduciary rule is promulgated though.
So ask your advisor and provider about the availability of retirement income solutions either to protect savings within the plan or for when participants retire. It may be early to institute a retirement income solution, especially in wit low interest rates, but it’s not too early to learn about the options.
Regulatory Action:
January 2010: DOL and Treasury jointly issued a Request for Information (RFI) on lifetime income options reflecting their interest in and support of these efforts. The RFI solicited input on the advantages, disadvantages and barriers to incorporating lifetime income options into a DC plan and educating plan participants on their DC plan lifetime income options.
February 2012: Treasury issued a guidance package on lifetime income that included proposed regulations on longevity annuities and partial annuitization in plans and revenue rulings to clarify spousal protection rules for lifetime income solutions.
May 2013: DOL released an Advance Notice of Proposed Rulemaking (ANPRM) to request feedback about how to communicate DC plan account balances as a lifetime income stream on participants’ benefit statements; this request included an example and an online calculator. According to the DOL’s regulatory agenda, this initiative remains a priority.
July 2014: Treasury issued final regulations regarding qualified longevity annuity contracts (QLACs), making them accessible to the DC and individual retirement account (IRA) markets.
October 2014: Treasury issued Notice 2014-66, which clarified certain questions pertaining to tax law compliance (e.g., Benefits, Rights and Features) when offering annuities within target date fund structures. As a companion piece, DOL, in an intra-agency letter, further clarified that plan sponsors may use a 3(38)* investment manager to assist in the selection of an insurance product and clarified the identity of the investment option as a QDIA (thus with attendant fiduciary safe harbor).
July 2015: DOL issued Field Assistance Bulletin 2015-02 to help clarify for plan fiduciaries how to exercise fiduciary responsibilities in selecting and monitoring annuities in plans.
