Can Legislation Boost Retirement Income Prospects?

By Andrew Remo • September 28, 2016 • 0 Comments
The legislative package that cleared the Senate Finance Committee unanimously in late September included provisions intended to encourage the use of lifetime income products, including a late addition that could turn out to be the most significant.

Lifetime Income Selection Safe Harbor

That provision — contained in the so-called “modified mark” of the Retirement Enhancement and Savings Act — is a proposal to flesh out the existing fiduciary safe harbor for the selection of a lifetime income provider.

The Department of Labor (DOL) issued regulations in 2008 providing for a safe harbor for a plan fiduciary to satisfy the “prudent man” standard of care in selecting an annuity provider and a contract for benefit distributions from a defined contribution plan. However, plan sponsors continue to shy away from offering lifetime income products in defined contribution plans for fear of accepting perpetual liability for the financial health and capacity of the insurers that provide these guaranteed retirement income contracts.

The proposal makes clear that plan fiduciaries will not be liable following the distribution of any benefit for any losses that may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations if the plan fiduciary takes the following required steps:

  • engages in an objective, thorough, and analytical search to identify insurers;

  • considers the financial capability of the insurer to satisfy its obligations under the guaranteed retirement income contract;

  • considers the cost — including fees and commissions — of the guaranteed retirement income contract; and

  • concludes that at the time of selection the insurer is financially capable of satisfying its obligations under the guaranteed retirement income contract.

In addition, the plan fiduciary needs to obtain certain written representations from the insurer about the company’s ability to offer guaranteed retirement income contracts under state law and its financial health in order to use the safe harbor, and must conduct periodic reviews to ensure the continuing appropriateness of the plan fiduciary’s conclusions if the product remains available in the plan for future beneficiaries.

Lifetime Income Disclosure

The package includes a proposal to have one ERISA-mandated plan participant statement per year include a lifetime income disclosure. In May 2013, the (DOL) issued an advance notice of proposed rulemaking to require this, but the rulemaking has not advanced further along to date.

The proposal would direct the (DOL) is issue guidance within a year after the proposal is enacted illustrating a model lifetime income disclosure, written in a manner that can be understood by the average participant. That disclosure would calculate a lifetime income stream equivalent (both a qualified joint and survivor annuity and a single life annuity) based upon the participant’s total account balance.

Portability of Lifetime Income Options

The package also includes a proposal to allow plan participants to roll over their lifetime income investment to another retirement savings vehicle if the plan sponsor decides for whatever reason to discontinue that investment option in the plan — notwithstanding the existing distribution restrictions in employer-sponsored plans.

Andrew Remo is the American Retirement Association’s Director of Legislative Affairs.