In its most recent show of support for lifetime income products in defined-contribution plans, the Obama administration has said it may be “prudent” in particular circumstances to default participants into target date funds that bundle in annuities.
The Department of Labor indicated its position in an information letter published in late December, and some observers believe the DOL's position can be extrapolated to also encompass less-liquid asset classes that have not yet received much traction in 401(k) plans.
“I think the department's guidance is significant in confirming that a [qualified default investment alternative] can include annuities, with certain strings attached,” Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm, said.
“I think this is part of [its] ongoing interest in looking at how to encourage, or at least consider, use of annuities in a person's retirement planning goals,” he added.
As retirement security has grown more prominent in the national dialogue, some of the focus has shifted from the asset-accumulation to the drawdown phase.
The Treasury Department in 2014 tried
encouraging use of deferred annuities in 401(k) plans and IRAs by issuing guidance saying money in qualified longevity annuity contracts wouldn't be subject to required minimum distributions.
The DOL has also pursued rulemaking that would require participant account statements to include lifetime income illustrations.That effort fell short in the current administration, but
may be taken up by Congress in their new legislative term.
At the same time, TDFs have become the overwhelming favorite among employers as a default investment. A decade ago, the DOL said TDFs, balanced funds and managed accounts could serve as QDIAs, thereby easing fiduciary liability for plan sponsors choosing these investments as defaults.
But, as the DOL acknowledged in its recent
information letter, which was in response to a request from
TIAA asking if a particular product could serve as a QDIA, its “overarching focus” when developing the QDIA rules was “long-term accumulation of retirement savings” rather than lifetime income.
The DOL, in its recent letter, says TDFs with lifetime income options, as long as they meet certain liquidity and transferability guidelines, can serve as a default investment for 401(k) plans if plan sponsors conduct a due diligence exercise and determine it's prudent to do so in light of “all relevant facts and circumstances.”
“This information letter highlights that the DOL recognizes increased use of institutional style products in the 401(k) investment marketplace is a positive outcome, whether it's lifetime income or potentially other strategies,” David Levine, a principal at Groom Law Group, said.
Mr. Levine believes the letter is supportive of employers selecting a QDIA outside of a “plain vanilla” TDF, assuming it is also a prudent investment.
Similarly, Jonathan Epstein, president of the Defined Contribution Alternatives Association, believes the DOL's letter can be extrapolated to include asset classes such as
private equity, hedge funds, direct real estate and infrastructure.
“I think it bodes well for other
types of investments in TDFs that are less liquid,” Mr. Epstein said.
Asset managers specializing in such alternative investments have been working to develop products that could be used as a sleeve within custom TDFs, given high growth projections for TDF assets over the next several years.
Such strategies have not received much traction among employers, though, especially in light of growing litigation targeting employers for fiduciary breach in their retirement plans.
Marcia Wagner, principal at The Wagner Law Group, said although information letters from the DOL show how the DOL thinks about a particular subject, they don't carry as much weight as a formal rule-making process, and it is likely overly aggressive to extrapolate the DOL's positions beyond annuities.
“This is a narrow kind of ruling on behalf of TIAA. I'm not sure I would extrapolate it much further than what it states,” Ms. Wagner said.
