2010 push for income in DC plans expected

Federal regulations and legislation that would make it easier for defined-contribution plans to include lifetime-income products are expected to be introduced next year.

The Senate Special Committee on Aging is planning to hold hearings in the spring on this issue, while the Labor and Treasury departments soon are expected to put out a request for information on lifetime-income products within DC plans.

Regulations are likely to come first, according to industry observers, who don’t expect any such legislation to be passed in 2010.

“Just like this year’s budget had the auto-individual-retirement-account proposal, it wouldn’t surprise me if we see the Obama administration promote income in defined-contribution plans,” said James M. Delaplane Jr., a partner at Davis & Harman LLP.

Trial annuitization

One idea that is likely to make it into proposed legislation is the concept of annuitization, he said.

Under this concept, which was introduced by the Retirement Security Project in June 2008, a portion of a retiring employee’s 401(k) assets automatically would be swept into an annuity product chosen by the employer, unless the employee opted out of the program. Retirees not opting out would stay in the plan for a trial two-year period, during which they would receive monthly payments from their 401(k) plan.

“Other countries, like the U.K., have forced annuitization,” said an aide to the Special Committee on Aging, who asked not to be identified. “I don’t think that would ever fly here, but we are forcing people to make really complicated financial decisions, and we want to look at what barriers there might be to these products, and how they can be addressed.”

Over the past few years, a number of companies, such as Barclays Global Investors and Prudential Financial Inc., have launched in-plan products designed to help participants set up an income stream for their retirement.

The number of such offerings will grow as baby boomers retire.

“There has been an increasing interest in the pension and savings community in the notion that we can do more to help people manage their funds in retirement,” said J. Mark Iwry, senior adviser to the secretary of the Treasury and deputy assistant secretary for retirement and health policy.

The Labor and Treasury departments are planning to publish a joint request for information “as a first step in exploring impediments, whether statutory, interpretive or regulatory, to the offering of lifetime-income products by plan sponsors and to the selection of such products by workers,” Assistant Labor Secretary Phyllis C. Borzi, who heads the Employee Benefits Security Administration, said during an online regulatory Q-and-A last week.

“It is premature to announce whether we will be publishing a safe harbor for in-plan annuities,” she said.

Financial advisers would welcome some clarity from Washington on lifetime-income products, specifically about how these products would work and how much they would cost.

“To get some of the information on the fees of these products, you have to go through 23 pages of a prospectus,” said Kevin Brosious, president of Wealth Management Inc.

Some advisers, while enticed by the idea of guaranteed income for their clients, worry about the potential for conflicts of interest in this marketplace.

“There might be some conflicting agendas with putting an annuity inside a plan,” said Robert Wander, president of Wander Financial Services LLC. “Anything they can do to lock people in is favorable to the investment provider if they are also the company running the 401(k) plan.”

Such potential conflicts of interest as well as the fees associated with these offerings will come under scrutiny during the congressional hearings, said Jason C. Roberts, a partner at Reish & Reicher.

“They are really going to look at how stacked the deck is in terms of what degree of influence the providers have over the plan if they are providing the guaranteed products,” he said. “I think in the 401(k) context, what they are going to be examining is similar to what they looked at with target date funds.”

Although experts think that Congress will introduce legislation on retirement income next year, few think that anything will get passed.

This month, Sens. Jeff Bingaman, D-N.M., Johnny Isakson, R-Ga., and Herb Kohl, D-Wis., introduced the Lifetime Income Disclosure Act, which would require employers to disclose to employees how much retirement income they could expect from their DC-plan accounts if they rolled them into an annuity.

One of the major barriers for these products is a concern about the viability of the insurance company providing the guarantee.

To address this, many industry officials would like to see Congress pass legislation that would create a national insurance charter or a Federal Deposit Insurance Corp.-type of guarantee around these products to encourage people to invest in them.

“Conversations about this are going on in various corners of Congress,” said Robert Reynolds, president and chief executive of Putnam Investments. “There are also some suggestions about providing tax relief that would encourage investors to take advantage of lifetime income.”

Regulation welcomed

In the more immediate term, experts think that regulations from the Labor and Treasury departments will come before any legislation.

“I think you will see bills put on the table addressing this issue, but I don’t see them getting to the president’s desk in 2010,” Mr. Delaplane said.

Regulation would be welcomed by industry officials.

“I hope that there is regulation in the retirement income space,” said Jamie Kalamarides, senior vice president of retirement solutions at Prudential Financial. “Specifically, I hope that plan sponsors are given safe harbors to enable retirement income products in plans.”

E-mail Jessica Toonkel Marquez at [email protected].