The efforts to get some sort of handle on how to review, assess and implement DC lifetime income programs is very reminiscent, to me, of my experiences following the system-wide impacts following the fundamental changes introduced by the 2007 403(b) regulations from the IRS-along with the rippling effect they had on the application of DOL and SEC regulatory rules. It wasn’t that the 403(b) rules were complex (though we often heard that complaint), it was truly a matter of fitting an unfamiliar scheme into an otherwise well-established market. Traditional 401(k) providers of all sorts plunged into 403(b) opportunities which were opened by those regulatory changes, finding that success was dependent on becoming familiar with quite a cache of logistical minutiae.
So, it is now that those policymakers, developers and promoter of DC lifetime income programs (many of us who have been actually working at this for quite a while) continue to hear the refrain that these programs, and the attendant insurance arrangements upon which many of them rely, are “complicated.” Having had to recently parse through some horribly complex fiduciary advisory material assessing the prudence of target date funds in defined contribution plans, I’m not so sure that insurance has cornered the market on “complexity.”
“Complexity” here seems to be more about the disconcerting demands required when unfamiliar “de-cumulation” programs are introduced into a market founded on accumulation. It’s all about the learning curve on how to use the rules with which we are all familiar to an unfamiliar set of facts.
For example, most of us can easily discuss the application of settlor versus fiduciary functions, but not where to draw the line for decumulation programs; the annuity contract is simply a contract which has been approved by regulators, the rub being limited terms which can be negotiated; identifying how the differing elements of the limited types of annuity types affect a de-cumulation program is not a particularly heavy lift; ERISA’s familiar prudence standards still apply, but in ways with which we are only now becoming familiar; and the plan document requirements are really quite simple and straightforward and can fit into most pre-approved programs, as long as you know what boxes to check in the adoption agreement. As I said, it is all about the learning curve.
Industry growing pains do abound, however, but they are similar to those which accompanied the transition from 401(k) private pooled trust accounts and balance forward accounting to the current, mutual fund/CIT based daily valuation programs. For example, we do not yet have an industry clearinghouse, like the NSCC for mutual funds, through which to coordinate and facilitate the transfer of insurance interests; and individual “middleware” services have been sprouting up to accommodate these transfers until the industry-wide infrastructure becomes more sophisticated. This is where most of the “complexity” really lies. The advisor and fiduciary need not be familiar with these underpinnings- they simply need assurances that the system works, and a knowledge of what limitations may be imposed at the end of the day.