In May of this year, the U.S. House of Representatives passed a piece of bipartisan legislation — the SECURE Act — which, if enacted, would represent a major step forward in expanding access to guaranteed lifetime solutions for American workers. While the Senate has yet to act on the bill, we remain optimistic that is not a matter of "if," but "when."
Here's why this matters to plan sponsors and advisers.
First, why is it that regulators, legislators, asset managers and thought leaders are encouraging the development and use of lifelong income vehicles? Two principal reasons: to deliver sustainable income to workers and to shift their focus from accumulating savings to generating enough monthly income once they retire, which is a key enabler of financial wellness. What may seem like a lot of money to a retiree — say a million dollars — becomes a smaller sum when you consider it as a $50,000 annual income over 20 years.
There are three primary ways for retirement plans to address lifetime income:
• Best Efforts — market-valued vehicles that offer control over assets and lower costs, but no guarantees;
• Fixed Annuities — deliver relatively high income, available only out of plan and with no control over underlying assets;
• Guaranteed Withdrawal Benefits — deliver control over assets and an income guarantee, at a higher cost reflecting the lifelong income
Despite the fact that nearly two-thirds of sponsors offer retirement income solutions of one sort or another, sponsors and advisers sometimes shy away from offering guaranteed options to participants.
Over time, as interest in lifetime income grows, it will become a differentiating factor for advisers: those who cannot offer cogent support in this area will find themselves at a competitive disadvantage.
Easing concerns
Let's address why some advisers still aren't sold on lifetime income.
Concerns about fiduciary risk is the most common. But advisers should rest easy: The Department of Labor has addressed this in various pronouncements going back into the early 2000s, spelling out how to evaluate and monitor the various options available. Others will ask the question about evaluating product options and costs.
Some advisers and sponsors have asked if the lifetime income safe harbor provision in the SECURE Act lowers standards for guaranteed products in defined contribution plans. The answer is no, for several reasons.
First, any provider offering guarantees must satisfy that state's solvency rules designed to protects citizens. Additionally, the safe harbor only applies to insurers who — for seven years — have not had their licenses revoked, filed audited financials, maintained reserves consistent with law, and are not operating under an order of supervision, rehabilitation or liquidation. The safe harbor further requires insurers to undergo financial audits at least every five years. These conditions do not exist in the current safe harbor; so, the expanded safe harbor actually serves to better protect plan participants than current law.
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Here is where the well-informed adviser may shine: by explaining the regulations, helping the plan sponsor understand and compare options, documenting the process, and shepherding a thoughtful implementation process.
As defined benefits plans continue to dwindle, we must continue innovating to help defined contribution plans fill the retirement security gap. The SECURE Act has spurred an important dialogue, and now is the right time for us all, especially advisers to dig in and learn about the exciting innovation taking place around lifetime income security. Those who fail to do this will likely be at a competitive disadvantage.
Doug McIntosh is vice president of investments at Prudential Retirement.
