Bruce Ashton, Martha Tejera and Michelle Richter-Gordon
March 21, 2023
Last December, Nevin Adams wrote a thought-provoking article titled “6 Obstacles to Retirement Income Adoption.” Nevin makes several interesting points, but in our view the obstacles he describes can be easily addressed as employers consider lifetime income solutions for their defined contribution retirement plans.
1. There is no legal requirement to provide a lifetime income option.
While the statement is true, we believe the absence of a legal requirement is irrelevant. Until this year (with the adoption of SECURE 2.0), there was no legal requirement to implement automatic enrollment, yet many plans implemented it voluntarily because it results in a higher level of savings and was therefore the right thing to do. Adding a retirement income option is not any harder than adding any investment to the plan and is likely easier than implementing automatic enrollment.
2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”
What can be safer than the safe harbor set out in SECURE 1.0? Plan sponsors have an absolute right to rely on written representations from an insurer unless they have actual knowledge that the representations are not true.
Further, there are various retirement income solutions available, some of which include a guaranteed income feature, like an annuity, but many others do not. Providing retirement income does not require providing an annuity.
Frankly, the selection of an annuity provider (if they select an insured product for their plan) should not be a concern for plan sponsors.
3. Operational and cost concerns linger.
Nevin refers to the portability concern regarding annuities saying that the “cost and complexity” would be “daunting, at best.” He also refers to the “‘learning’ curve, and…in some cases, an UN-learning curve — for plan fiduciaries, and those who advise them.”
SECURE 1.0 resolved the portability issue by allowing a participant to take a distribution of a product no longer supported by their plan and rolling it into an IRA. The costs associated with adopting this are routine — establish the administrative process, amend the plan, and communicate the rules.
Providers are also making it easier to transfer a retirement income product so that the product can remain as an investment alternative in the plan. If this option is available, plan sponsors can weigh the complexity and expense relative to the distribution approach.
Finally, since fiduciaries must act in the interest of the participants, plan sponsors and advisors may have a fiduciary duty to learn about retirement income solutions. Using this as an excuse to avoid consideration of retirement income solutions is, in our view, inappropriate.
Read more: https://www.napa-net.org/news-info/daily-news/retirement-income-adoption%E2%80%A6it-ain%E2%80%99t-hard
The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.
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