The headline in a recent New York Times piece cautions that “Confusing Options May Be Coming to Your 401(k). It Could Cost You.”
Those “confusing options”? Retirement income. And, ironically, they might undermine support for the most significant piece of pro-retirement legislation in a decade.
In fairness, the article begins by acknowledging to its readers that there might soon be some “welcome changes to the rules governing their retirement savings plans,” but quickly moves on to take to task the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which not only brings with it those welcome changes, but a key element that has some consumer advocates all atwitter (literally) – a fiduciary safe harbor for the selection of a lifetime income provider.
For years the retirement industry has bemoaned the lack of a lifetime income option in defined contribution plans. Indeed, for all the vaunted talk of the so-called “DB-ification” of DC plans, the latter has largely steered clear of embracing what is arguably one of the most compelling elements of DB plan design (aside from the completely employer-funded and managed aspects) – providing a pension, a stream of lifetime income.
Of course, in a DB plan, the cost and risk is on the employer, not only for the funding, but also for the provision of that pension benefit. DC plans have a very different dynamic, and DC plan sponsors have – largely – seen little upside in signing on for a decision that they see as carrying with it a liability that extends well beyond the employment relationship. Indeed, there have been any number of real and perceived reasons to avoid doing so.
The SECURE Act attempts to resolve some of that resistance – creating a legislative “safe harbor” in place of the one articulated by the Labor Department in 2008 and expanded upon in a 2015 Field Assistance Bulletin. Arguably, a legislative safe harbor is “safer” than one staked out by regulators, but plan fiduciaries hoping to find a fiduciary “free pass” won’t find one here, despite the concerns expressed in the Times.
The legislation states that a fiduciary is expected to engage “in an objective, thorough, and analytical search,” and that they must consider the financial capability of the insurer to satisfy its obligations, consider the cost (including fees and commissions) of the guaranteed income contract “in relation to the benefits and product features of the contract and administrative services to be provided under such contract,” and determine “at the time of the selection, the insurer is financially capable of satisfying its obligations under the guaranteed retirement income contract…”.
Now, unlike the regulatory safe harbor, the SECURE Act outlines some pretty specific criteria as to what would satisfy the financial capability tests, specifically that the fiduciary gets written confirmation from the insurer that they:
- are licensed to offer such products;
- have operated under a certificate of authority from their state insurance commission at the time of selection, and for the immediately preceding seven years;
- have filed audited financial statements in accordance with the laws of that state;
- maintain reserves that satisfies those state requirements;
- have undergone, at least every five years, a financial examination (in accordance with those state requirements); and
- that they will “notify the fiduciary of any change in circumstances occurring after the provision of the representations” detailed above that “would preclude the insurer from making such representations at the time of issuance” of the contract.
The SECURE Act goes on to clarify that while fees are a consideration, there is no requirement to select the lowest cost, and that the fiduciary may consider the value of the contract, including features and benefits and attributes of the insurer. It also states that the fiduciary will be deemed to have conducted the required “periodic” review if they receive the written representations from the insurer on an annual basis, unless they receive a contrary notice, or are aware of “facts that would cause the fiduciary to question such representations.”
If all of those conditions are met, the SECURE Act goes on to limit the liability of the fiduciary for any losses “that may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the terms of such contract.”
While the fiduciary obligations to review and evaluate the insurer resonate with ERISA’s fiduciary admonitions, the concerns raised in the Times article seem to be twofold: that the mere existence of this new safe harbor will be touted as the free pass it most surely isn’t – and that the relative specificity of the conditions deemed to satisfy the financial capability test will result in a mere checkbox review – and that the checkbox – basically doing business in a state (and let’s remember that various states have varying requirements) while avoiding running afoul of those same state regulators – will serve as a back door for the annuity pitching “foxes” to enter the 401(k) “hen house” and those participant accounts to which they have long effectively been denied access.
Now, if in fact those results do flow from the SECURE Act’s implementation (and its integration with the Senate’s Retirement Enhancement and Savings Act (RESA)), there would be cause for concern. Certainly, SECURE’s lifetime income provider fiduciary safe harbor is a more secure mooring for plan fiduciaries than the current landscape, if only because it provides some structure for the assessment of the financial capability of the product provider. That said, you could hardly be faulted, however it’s ultimately pitched, for not seeing a ton of daylight between that new safe harbor and the current fiduciary landscape. And the legislation, to my eyes, anyway, minces no words in reminding plan fiduciaries of the existing obligations under ERISA to assess, monitor, and review the conditions underlying the suitability of the lifetime income option as a prudent plan investment.
Unless, of course, you’re reading the Times (instead of the actual legislation) – and you are concerned enough at the potential abuse that you’d consider withholding your support for the legislation, legislation it’s worth remembering passed the House by the kind of margin generally reserved for the naming of post offices.
Now, what the Times article gives voice to is a seed of distrust – viewing the safe harbor language not as a relatively modest means to encourage consideration of an option that experts have long said was needed, for which participants routinely express interest (in surveys, if not actual take-up rates), but that plan fiduciaries have nonetheless been reluctant to embrace.
When all is said and done, this safe harbor may not be “enough” – but it is a step, and fear-mongering notwithstanding – it is arguably a step along a path to a retirement that is, indeed, more secure.