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Are Concerns About Lifetime Income Portability Still Valid?

A new report claims that while portability is frequently cited as an obstacle to offering a lifetime income product, portability solutions and options are available today but are not well recognized.

In-Plan Guaranteed Lifetime Income: Debunking Portability Myths,” published by the Institutional Retirement Income Council, notes that after what it terms “some trial and error beginning around 2004,” in-plan guaranteed lifetime income products have settled into a standard administrative form acceptable to plan recordkeepers. The report notes that this model is consistent with the capabilities and processes for recordkeeping daily valued and traded funds, and is codified in the SPARK income data file standards that are used by guaranteed lifetime income product providers today, as well as the recently published SPARK touchpoint guidelines.

The report notes that a recordkeeper who already offers the product across their platform will likely have integrated the product into their participant “experience,” and will likely already have connectivity in place for sending data and receiving data relevant to individual participant benefits. If it doesn’t, of course, things are considerably more complicated. While the report basically takes a glass-half-full perspective, it does acknowledge a number of scenarios:

New recordkeeper agrees to recordkeep the product and to fully integrate guaranteed lifetime income into their services.

The report explains that this will require an investment of time and resources by the recordkeeper and will probably impact the transition timeline. Once that happens, however, it says that the investment can be mapped to the new recordkeeper and he accrued benefit can transfer over. On an ongoing basis, data will be passed between the recordkeeper and the product provider or income middleware.

New recordkeeper agrees to recordkeep the product but not to integrate guaranteed lifetime income into their services.

In this case, the authors note that the product becomes frozen to new contributions and new participants, but the guarantees continue to accrue. They acknowledge that there is “some build out” on the part of the new recordkeeper that they say would “slightly” impact the transition timeline. They say that in this case the best practice is to wait for the build out to be complete before transitioning the entire plan over. They note that under this scenario, the recordkeeper would interact with the retirement income provider or middleware for participant transactions, but would not be responsible for providing guarantee information to participants (unless, of course, it chose to do so in some manner). With the product on its recordkeeping system, the recordkeeper would be able to provide Form 5500 reporting to the plan.

New recordkeeper refuses to recordkeep the product, but the sponsor wants to keep it in the plan.

Things arguably are more complicated in this situation, but the authors note that, if it is agreeable to all parties, assets could transition to the product provider who would recordkeep that portion of plan assets. As was the case in the prior situation, the retirement income product generally becomes frozen to new contributions and new participants, but the guarantees continue to accrue. The retirement income provider would send out statements on the product.

Funds in the product would, of course, be completely separate from the rest of the plan’s funds — participants would essentially have two sets of processes to follow, and the plan would need to compile data from two sources for Form 5500 reporting purposes.

New recordkeeper is an insurance company and agrees to “buy out” the guarantee as part of the conversion.

The report says that some insurance companies are willing to “buy out” the contract and maintain the same or similar benefit under a new contract. It notes that with many income products, there are two values — a market value and a guaranteed lifetime income amount or value — and that some insurance companies are willing to provide their new client the higher of the benefit offered by the prior insurance company or the benefit provided by the new incumbent insurance company.

What if neither recordkeeper nor income provider will support the offering?

The paper also deals with the situation where neither the recordkeeper nor the income product provider will support the product on the new platform. The authors see two interconnected fiduciary concerns behind this question:

  • Is a plan locked into staying with a recordkeeper in order to preserve the guaranteed lifetime income product in which participants have invested?

  • Is it a fiduciary breach to switch providers because the change will be detrimental to individual participants who lose the benefits of the product for which they have been paying?

According to the paper’s authors, the short answer to both of these concerns is no.

Their rationale is that in making a decision regarding what is prudent for the plan and in the interest of its participants, fiduciaries should consider the interests of individual participants but are not barred by those interests from acting. Not that those individual interests shouldn’t be carefully considered; the loss of the guaranteed lifetime income product by some participants is a factor that fiduciaries will need to consider as part of their prudent process. However, the authors note that this factor alone should not guide their decision, “since it is no more important than issues of the quality of the services, the availability of other investments, costs, service provider compensation, and so on.”