The idea of Lifetime Income programs under defined contribution plans has become well accepted in the retirement plan community. There are numerous studies which show their value, from a retirement policy standpoint, and the attractiveness of those sorts of programs to both plan sponsors and plan participants. Also widely discussed, however, is the fact that there is minimal uptake of these programs by plan sponsors, even where there is a growing variety of well-designed options available from which fiduciaries and sponsors to choose. It seems as if, as Matthew Eickman (the Managing Partner at the Fiduciary Law Center) observed, that we are now into a “how do you make it available” phase of development.
This is not necessarily about garnering plan sponsor interest; every indicator is that the interest is there. In reality, it’s more about product delivery: how do you get widespread integration into the DC ecosystem?
What is needed to make it work, from my own long experience, is basic business acumen. It simply has to be “worth it” to the businesses invested in that “ecosystem” to commit the financial resources necessary to build the expertise to develop, market, implement and support changes to the ecosystem to make DC Lifetime Income readily available to plans. This has to happen regardless of what sort of DC LI program one may want to build and promote, whether it be tontines, annuities, CIT target date programs, systematic withdrawals, in-plan based programs, or IRA based purchase programs.
We are in a market well-conditioned, after Schlichter and Deere, to focus extraordinary efforts on reducing the costs of investments to plans. But what happen if those costs, mostly related supporting collective investments found in mutual funds, CITs and insurance separate accounts, are simply not sufficient to support the infrastructure necessary to make a very different-but-valuable financial function work?
Yet we see little in the market explaining to affected fiduciaries the necessity, or the value, of paying for such efforts. This lack of explanation and discussion is, very unfortunately, resulting in a number of opaque practices often being utilized, which never will be seen under 408(b)(2) or 404a-5 disclosures.
A plan’s paying these costs can be both prudent and reasonable, either directly or as built into the products themselves, and can well meet the DOL’s proposed prudence safe harbor requirement-if adequately explained and disclosed. Yet, without this forthright sort of discussion and disclosure, I see little chance there will really be a coherent way to fully and rationally compare these programs to each other.
If a business undertakes to provide guarantees, or access through DC plans to them, it would be well worth reconsidering any efforts which may infer that this uniquely positioned benefit is somehow being provided without cost, or with costs which are comparable to making equity investments available.