Recently, a colleague of ours completed The Adirondack Forty-Sixers, a mountain-climbing challenge winnable by only the most athletic and daring.
On the same day our friend completed this epic journey, the 11-year-old daughter of one of this article’s authors finally managed to surmount the “hard” trail on our neighborhood’s rock-climbing wall.
On the surface, these two feats bear little resemblance to one another; but, watching the 11-year-old climb this elusive-for-her trail demonstrated just how much one can accomplish by documenting, practicing and developing expertise in a process until it becomes second nature.
There are other analogies between mastering these acts of physical prowess and those of making best practice in-plan retirement income recommendations than might seem obvious on the surface.
When it comes to the struggles of plan sponsors needing to offer world-class benefits to compete for talent, before the SECURE Act, enhancing employee benefits by adding retirement income solutions to a Defined Contribution (DC) plan was an arduous, multiyear journey fraught with (fiduciary) peril. Following the SECURE Act, however, a color-coded, neatly-mapped trail that makes climbing and reaching the pinnacle of the benefits-offering terrain available to plan sponsors and it is far easier to implement than is climbing 46 mountains.
As discussed in a recent white paper by The Institutional Retirement Income Council, the SECURE Act settled one of the two material questions frequently raised by plan sponsors regarding the inclusion of annuities in a plan lineup: the first question was already answered by reference to existing DOL guidance, but the application of this DOL guidance to the issue of providing annuities is often not properly understood or appreciated.
This first question relates to understanding when a plan is making a business decision as opposed to a fiduciary decision; the second, which was indeed answered by the SECURE Act, relates to how a plan sponsor must consider the ease of portability of a given retirement income solution. In other words, sponsors want to know that plan participants can take with them to a new plan, or into a rollover IRA, any annuity guarantees for which they have historically paid.
The SECURE Act clearly states that the decision whether to add an annuity to a DC plan, proper analysis of the DOL guidance on the distinction between settlor and plan fiduciary decisions and expenses relating thereto is a business competitiveness (settlor, not fiduciary) decision. Because in-plan income can be offered at a price point typically below that of retail solutions, employers may view the ability to provide this benefit as a competitive advantage.
Furthermore, many in-plan income products are designed to work throughout the participant’s lifetime, which can result in those plans that deploy in-plan income solutions retaining participant assets through, not just until, retirement. Rolling assets out of a plan at the time of retirement has historically been a common outcome, but recent trends suggest a desire by more plan sponsors to retain participants in their plan through retirement. Economies-of-scale can be recognized by keeping more participants in a collective plan for a greater time period. This in turn, lowers per-participant administrative costs of plan maintenance, making income addition a potential long-term cost saver for a plan.
It is only after a plan sponsor makes a determination to add one or more income solutions either as a default option, or to a plan lineup, that the fiduciary process of selecting which product, offered by which issuer begins.
When a plan sponsor is choosing an appropriate in-plan income solution, the next step is to evaluate the solution’s portability. This will typically involve examining three categories that, from an operations framework, are in union: what is the experience like when a participant retires or terminates employment, and moves their annuity out of plan; what happens when a plan sponsor decides to remove an offered income program; and what happens when a plan sponsor changes record-keepers and retains the income solution.
SECURE mandates all of these questions be addressed. The operational question for the retirement industry will be “how to do this smoothly at both the mega employer plan and the small business?”
The reality of all three situations will involve a potential need to interact with product manufacturers on behalf of tens, hundreds, or even thousands of plan participants, usually in a defined window of time.
Plan sponsors that have added one of these products are demonstrating their commitment to provide employees financial security in retirement. Next, plan sponsors need to be equally thoughtful about the back-office support that makes possible an intuitive and easy-to-use method for securing their in-plan income. This smooth operational experience is best supported through the creation of user-friendly web applications.
When portability is a plan participant event — retirement, termination, SECURE one-time withdrawal provision — the retirement industry will need to perform these transactions at scale, making digital strategies highly enabling. Imagine a single sitting web app supplemented by record-keeper data. Such a web app could use single-sign-on technology from the member benefits portal, it could greet the plan participant by name, it could use real-time annuity illustrations to enable picking the benefit form or adding a spouse, and once the contract/certificate was in good order, all parties could be notified.
When portability involves a change in record-keepers, the process is simplified. The same ‘data rails’ that powered the plan participant experience can be used without the web app.
Adding annuities to an employer-sponsored retirement plan once mirrored a challenge akin to mountain-climbing.
The fiduciary and portability-related guidance provided by the SECURE Act has turned mountains into, if not exactly molehills, no longer a multiyear climbing challenge befitting only the most dedicated of mountaineers. Both the SECURE Act itself, and expert interpretation of SECURE, can enable those plans with a business interest in implementing lifetime income solutions to follow a color-coded path past the apex of plan participant accumulation mountain, and safely back down through decumulation valley, with a safe income base that lasts for a participant’s lifetime.
Michelle Richter is the executive director of the Institutional Retirement Income Council, a nonprofit, membership-based organization of retirement industry advisers.
Trevor Gary is the CEO of Micruity, a technology company powering institutional income products by providing life insurers, asset managers, and record-keepers a single secure data connection for communicating and building seamless participant experiences.