New media for me, enjoy!
http://www.blogtalkradio.com/the401kstudygroup/2013/03/15/the-alphabet-soup-of-the-401k-industry
Friday, March 15, 2013
Retirement Income Solutions - In-Plan or Out-of-Plan?
Very recently, we had a paper published in the Journal of Compensation and Benefits. Dr. Greg Kasten is the primary author, and I had a small contribution to it. You will find it linked here:
https://www.unifiedtrust.com/documents/RetirementIncome-InPlan-vs-OutOfPlanSolutions.pdf
The paper deals with the recent trend of offering guaranteed income products, often in the form of a Guaranteed Income for Life Annuity, inside of 401(k) Plans. The purpose of the article was to explore if real demand existed for such products and if so, were they better placed inside of a qualified retirement plan or outside of one?
Summary of findings: Guaranteed Income for retirement, simply put, is a good idea. However, the current availability of these products within the 401(k) space is poor. The products are at an immature stage in their life cycle and are problematic for a variety of reasons. Thus it would be advisable for a client to seek guaranteed income outside of their 401(k).
Going a little deeper:
1.) Retirement Income Products are desired to provide a regular guaranteed stream of income.
2.) Many 401(k) service providers are putting these types of products into their 401(k) plan products.
3.) Question: Will employers and participants be better served with these products in a 401(k) Plan or outside of it, post retirement or in an IRA?
4.) Concerns for In-Plan Solutions:
a. Fiduciary Prudence – Is it a good idea for an employer to endorse an income product by putting in a plan as a Designated Investment Alternative?
i. Time and resources required to satisfy regulatory requirements for specialized products
ii. Lack of benchmarking and monitoring guidance for new products
iii. Risk of fiduciary liability for failing to meet participant expectations
b. Product Feature Issues:
i. In order for the participant to receive the full value of the Income Product – They must be held to term. In many cases, early withdrawal or cancellation can be excessively wasteful.
ii. Diversification Issue – Currently, the insurance carrier who supplies the Income Product typically will only offer one Income product, their own. They will not allow fair competition for the employee to select the one that’s best for them. It is like offering a 401(k) plan with one balanced mutual fund and a money market fund and saying if they want access to the market, they can invest in the balanced fund. What if the balanced fund isn't appropriate for that participant?
iii. Portability – In order for employers to exercise their fiduciary duty, they must periodically check the marketplace to ensure that what they have is still in the best interest of the participants. Over the lifetime of a plan, it is likely that a service provider change will occur, typically every 5-8 years on average. At present, these Income Products are not portable. This presents a practical issue for the employer.
Do they make a provider change and force the participant to sell their Annuity early and take a large loss? If yes, that’s a big fiduciary risk.
If no, do they operate the plan with multiple service providers, requiring coordination between vendors, excess fees to administer, etc.?
Do they not make a change to avoid options 1 and 2? This is akin to being held hostage by a bad investment arrangement.
https://www.unifiedtrust.com/documents/RetirementIncome-InPlan-vs-OutOfPlanSolutions.pdf
The paper deals with the recent trend of offering guaranteed income products, often in the form of a Guaranteed Income for Life Annuity, inside of 401(k) Plans. The purpose of the article was to explore if real demand existed for such products and if so, were they better placed inside of a qualified retirement plan or outside of one?
Summary of findings: Guaranteed Income for retirement, simply put, is a good idea. However, the current availability of these products within the 401(k) space is poor. The products are at an immature stage in their life cycle and are problematic for a variety of reasons. Thus it would be advisable for a client to seek guaranteed income outside of their 401(k).
Going a little deeper:
1.) Retirement Income Products are desired to provide a regular guaranteed stream of income.
2.) Many 401(k) service providers are putting these types of products into their 401(k) plan products.
3.) Question: Will employers and participants be better served with these products in a 401(k) Plan or outside of it, post retirement or in an IRA?
4.) Concerns for In-Plan Solutions:
a. Fiduciary Prudence – Is it a good idea for an employer to endorse an income product by putting in a plan as a Designated Investment Alternative?
i. Time and resources required to satisfy regulatory requirements for specialized products
ii. Lack of benchmarking and monitoring guidance for new products
iii. Risk of fiduciary liability for failing to meet participant expectations
b. Product Feature Issues:
i. In order for the participant to receive the full value of the Income Product – They must be held to term. In many cases, early withdrawal or cancellation can be excessively wasteful.
ii. Diversification Issue – Currently, the insurance carrier who supplies the Income Product typically will only offer one Income product, their own. They will not allow fair competition for the employee to select the one that’s best for them. It is like offering a 401(k) plan with one balanced mutual fund and a money market fund and saying if they want access to the market, they can invest in the balanced fund. What if the balanced fund isn't appropriate for that participant?
iii. Portability – In order for employers to exercise their fiduciary duty, they must periodically check the marketplace to ensure that what they have is still in the best interest of the participants. Over the lifetime of a plan, it is likely that a service provider change will occur, typically every 5-8 years on average. At present, these Income Products are not portable. This presents a practical issue for the employer.
Do they make a provider change and force the participant to sell their Annuity early and take a large loss? If yes, that’s a big fiduciary risk.
If no, do they operate the plan with multiple service providers, requiring coordination between vendors, excess fees to administer, etc.?
Do they not make a change to avoid options 1 and 2? This is akin to being held hostage by a bad investment arrangement.
iv. Rollover ability – If participants change jobs, these products
can’t be rolled to another employer’s plan, and perhaps not even into an
IRA. For people who change jobs periodically, this presents another
practical issue. What does the participant do in the event of a job
change?
v. Fee transparency and reasonableness – Because these are
individual annuities, the benefit of pricing power from asset aggregation is
lost. As a result, these annuities are often expensive and opaque in
nature. Further due to what is listed above, they would fail the DOL’s definition
of a fair or reasonable contract or arrangement. Specifically, the DOL
views a reasonable contract or arrangement as one that is explicit in fees,
written and that can be terminated in a reasonable time frame without fee or penalty. These currently do not meet that standard.
written and that can be terminated in a reasonable time frame without fee or penalty. These currently do not meet that standard.
vi. Survivorship - Most of the current versions of these
Income for Life annuities are participant only, meaning that they don’t extend
benefits to the surviving spouse in the event of death. Compared to
income products that exist in the open market, this is a very big disadvantage.
5.) Based on the above, the advice is that Income for Life products
are a good idea, but are immature in their product life cycle. Guaranteed
Income can be found elsewhere, i.e outside the 401(k) plan, with more
advantageous features and benefits. Until the next generations of these
are created, it would be inadvisable to put them into a 401(k) Plan.
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