Printer
Friendly Version
November 2005
This report was produced by the Advisory Council on Employee Welfare
and Pension Benefit Plans, which was created by ERISA to provide advice to
the Secretary of Labor. The contents of this report do not necessarily
represent the position of the Department of Labor. |
The Working Group on Retirement Distributions & Options(1) undertook
three issues for study, all of them related to participant retirement. The
balance of this report will address the scope of the Working Group, the
questions for witnesses, dates of testimony and list of witnesses, current
environment for the scope of inquiry, consensus recommendations to the
Secretary of Labor and summary of testimony from the witnesses.
Advisory Council Working Group Members
-
Chris Rouse, Chair, Windham Brannon, PC
-
Richard D. Landsberg, Vice Chair, Nationwide Financial Services
-
C. Mark Bongard, Ashland Inc.
-
Charles J. Clark, Aon Consulting
-
Lynn L. Franzoi, Fox Entertainment Group
-
Kathryn J. Kennedy, The John Marshall Law School
-
Mary B. Maguire, Davis Consulting
-
James D. McCool, Schwab Corporate Services
-
Thomas C. Nyhan, Central States Funds
-
Willow J. Prall, DeCarlo & Connor
-
R. Todd Gardenhire, ex officio, Smith Barney
-
Sherrie E. Grabot, ex officio, GuidedChoice, Inc.
This Working Group made inquiry into the nature of the distribution
options available to participants of defined contribution qualified
retirement plans, and the sufficiency of the communication of the options
to retiring or terminating participants. The scope of the inquiry was to
discern the functional utility of existing plan distribution options, and
to determine if existing choices effectively allow participants to “manage”
income from retirement plans by efficiently “spending down” retirement
assets without outliving those assets. The goal of the study was to assess
and recommend to the DOL those plan distribution options that allow plan
participants broad choices to facilitate managing their retirement income
in a manner consistent with personal objectives. The desired results of
the study were to determine whether:
-
Retirement and distribution options are effectively communicated to
retiring and withdrawing participants to facilitate individual management
of their retirement plan asset.
-
Life only, joint and survivor and period certain annuities should be
mandatory options offered in defined contribution qualified retirement
plans in addition to existing options such as lump sum distributions and
other forms of account balance liquidation.
-
Phased retirement should be an option for plan participants. What
are the tax, funding and ERISA issues of “phased retirement?” Do these
issues raise impediments to plans design that can/cannot be overcome?
The Working Group consensus was that retirement and distribution
options are effectively communicated to retiring and withdrawing
participants. However, an “information gap” exists between the
participants receiving qualified plan distributions and plan sponsors.
Most information communication with defined contribution plan participants
is focused on asset accumulation rather than asset decumulation. To
facilitate communication of decumulation information, the Working Group
recommends that regulatory relief and clarity be afforded in follow-up
pronouncements to Interpretive Bulletin 96-1 specific to retirement income
planning.
We heard testimony that, when offered, plan participants rarely select
annuities are not often selected as a distribution option, and that
obtaining an annuity with retirement plan assets can be readily handled by
rolling over plan assets into an IRA. Therefore, the Working Group does
not believe that life only, joint and survivor and period certain
annuities should be mandatory options offered in defined contribution
qualified retirement plans. However, we also heard testimony about an
increase in retirements as the baby boomers retire, and about the
projected growth in the size of retiring participant 401(k) accounts as
the time 401(k)s have been funded increases. This testimony led us to
believe that an annuity option in 401(k) plans could have many benefits to
retirees, particularly when coupled with our recommendation regarding
education when approaching retirement. But, we also heard testimony that
regulatory relief from the outcome based standard of IB 95-1 (“safest
available”) to a process-based approach to selecting annuity offerings
is needed to help alleviate some sponsors’ concerns about fiduciary
liability related to offering annuity options in a DC plan. We also heard
that providing for acceptance of electronic signatures could reduce plan
administrative costs and other burdens. To facilitate the availability of
annuity options in defined contribution plans, particularly 401(k) plans,
we recommend that the DOL revise IB 95-1 to clarify sponsor fiduciary
responsibilities and provide for a process driven approach to plan annuity
selection. We further recommend that the DOL provide regulatory relief
that facilitates the use of electronic signatures for handling plan
distributions.
The regulations currently in place enable defined contribution plan
sponsors to design their plans so those who desire to drawn down their
plan asset while an employee can do so without onerous consequences.
Because most plans provide for withdrawal after age 59½, we do not
recommend any changes in this area.
The scope of inquiry for the Working Group and the attendant questions
were given to all of the witnesses in advance of testimony. The witnesses
were told that the questions were merely a starting point to generate
thought and discussion of the scope of the Working Group. The questions
were not intended to limit the parameters of testimony.
Questions for Witnesses
-
What are the plan distribution options available to defined
contribution arrangements?”
-
What are the most prevalent distribution options found in defined
contribution plan design?
-
How and when are the retirement/termination plan asset withdrawal
options communicated to the participants?
-
What financial advice is provided to retiring/withdrawing
participants regarding effective use of their defined contribution plan
asset.
-
Why do you think a defined contribution plan sponsor might delete or
avoid annuity distribution options?
-
What is the effectiveness in meeting retirement income needs to life
expectancy from existing defined contribution distribution options?
-
Do retirement distribution options available from IRAs into which
qualified plan distributions may be rolled over provide sufficient variety
to effectively provide options beyond what might be available in a
particular qualified defined contribution plan?
-
Can individual commercial annuities be utilized to completely
transfer longevity risk from the plan sponsor and plan participant?
-
Do group annuities exist with group annuity pricing for the purpose
of transferring longevity risk from plan sponsor and plan participant?
-
Would annuities offered as an option through a qualified retirement
plan require unisex pricing? Would COLAs be available on such annuities,
not unlike COLA provisions in defined benefit plan income streams?
-
What is the effectiveness in meeting retirement income needs to
life expectancy from commercial annuities? Do immediate annuities have
COLAs to hedge inflation risk?
-
Are there benefits from an expense and investment perspective to
having periodic distributions made from an account either in a defined
contribution plan or in an IRA over a stated period (which could be
defined as the life expectancy of the participant) without utilization of
an annuity contract?
-
What is the concept of phased retirement?
-
What are the primary barriers (legislative, legal or cultural) to
phased retirement in the United States today? What are the corporate
incentives for corporations to have phased retirement?
-
What are the administrative challenges to existing qualified
retirement plans from the implementation of a phased retirement program?
-
Does existing literature show that workers will delay retirement
where a phased retirement program is in place? Does existing literature
show that workers will have a better retirement income from a phased
retirement company sponsor?
-
What are the demographic and industry characteristics of phased
retirement companies?
The Working Group solicited testimony on these questions of witnesses
from a broad cross-section of the qualified retirement plan industry. The
witnesses and the dates of their testimony were as follows:
July 8, 2005
-
David Wray, President, Profit Sharing/401(k) Council of America
-
Kelli Hueler, President, Hueler Companies
-
Jerry Bramlett, President, The 401(k) Company
-
Kent Buckles, President, Invesmart
-
Catherine Wilbert, Assistant General Counsel, Northwestern Mutual
Life Insurance Company, representing American Council of Life
Insurers
-
Kenneth Kent, Consultant, Cheiron U.S., representing the American
Academy of Actuaries
September 22, 2005
-
Dana Muir, Professor, Ross School of Business, University of
Michigan
-
Stacy Schaus, Practice Leader – Personal Financial Services,
Hewitt Associates
-
Keith Hylind, Vice President, Metropolitan Life Insurance
-
Trisha Brambley, President, Resources for Retirement, Inc.
-
John Kimpel, Senior Vice President & Deputy General Counsel,
Fidelity Investments
-
Cindy Hounsell, Executive Director, Women’s Institute for a Secure
Retirement (“WISER”)
Qualified retirement plans have always operated in an environment of
economic turmoil and change. Business cycles have long been part of the
pension-planning environment. Nevertheless, as several witnesses
testified, many retirement plan participants are shifting their focus from
accumulation of assets to the distribution of plan assets.(2)
Part of the
reason is changing demographics, primarily the baby boomer age group
approaching retirement, and part is due to the growth of participant’s
defined contribution plan asset and the increasing amount of retirement
assets under employee control.(3)
In the 21st century, demographics will increasingly interact with
economics. Slowly, the definition of retirement is changing, as people
build phased retirement programs and even move into new careers after “retiring”
from another.(4)
One measure of success of a defined contribution plan (“DC plan”)
is the plan’s ability to deliver enough money to ensure that
participants can afford to retire.(5)
Yet many plan sponsors do not focus
communications on this outcome, instead emphasizing communications to
participants that educate them to opportunities to save more, diversify
their investment portfolios and other accumulation topics.(6)
Typically,
employers don’t investigate individual participant account balances and
savings rates, and more importantly for our Working Group’s topic, nor
do they project participant account balances to retirement and offer decumulation education. As a result of the trend in plan design toward
participant directed defined contribution plans, participants in defined
contribution plans have taken on more and more investment risk during the
accumulation phase, and more longevity and inflation risk during the
decumulation phase.
In the future, the focus of the management of an income stream is
expected to result in greater attention to the retirement phase, which
focus dictated the nature and scope of the inquiry by the Working Group.
Testimony indicated that many DC plan distributions tend to be
paid out in lump sums even when other alternatives are present.
Necessarily, the implications of investment variability become paramount.
In contrast to the life annuity payout form of defined benefit plans, lump
sums expose retirees to a wide range of risks including the possibility of
outliving assets, investment losses, and inflation risk.
There is little evidence in the testimony to suggest that plan sponsors
who currently do not offer an annuity option are interested in adding one
(either voluntarily or by Government mandate). The most common reasons
given for lack of interest in adding annuities as an optional form of
benefit include perceived non-use by participants, impression that
annuities are too complicated, and fiduciary concerns, such as selecting
an annuity provider for retiring participants. In fact, testimony was
heard that in some plans existing annuity options were replaced by lump
sum alternatives as a result of the revised anti-cutback rules. Little
clamor was raised by the industry as a result of losing annuities as a
benefit distribution option. Several witnesses conceded that the burden of
paperwork on plan sponsors and administrators for a benefit distribution
annuity option makes the favorability of such an option unlikely. For
instance the consent forms, notarization, explanations in SPDs etc. all
complicate the use of annuities as an option with paperwork that doesn’t
accompany other distribution options (i.e. “lump sum”).
Employees nearing retirement often turn to their employer for
retirement income planning advice. Given this preference, about 33 percent
of employers offer investment advice to DC plan participants about
retirement income planning. Testimony indicated that confusion exists over
the difference between education, advice and guidance. Where does help end
and liability start?
Retirement Income Planning Options
The Working Group believes that retirement and distribution
options are
communicated adequately to retiring and withdrawing participants. However,
the Working Group believes that there is an “information gap” that
exists between the communication of options and the understanding of the
ramifications of the various distribution options to an individual plan
participant. This lack of understanding appears to exist in participants
that are not close to retirement, to those approaching retirement, and to
participants already in the process of receiving qualified plan
distributions. Specifically, the Working Group finds that:
-
Plan participants are not afforded decision making tools that
effectively facilitate individual management of retirement plan assets.
Focus heretofore has been on accumulation of participant plan assets and
not on the management of an income stream in retirement.
-
Guidance is needed for the decumulation phase of retirement income
management that is akin to the accumulation phase. Specifically, safe
harbor guidance should be afforded for retirement income planning just as
it was afforded to plan asset accumulation in IB 96-1.
The Working Group believes that neither the DOL nor employers need
provide any new brochures, worksheets, or pamphlets etc. for participants.
Instead, the Working Group suggests that regulatory relief and clarity be
afforded in follow-up pronouncements to Interpretive Bulletin 96-1
pertaining to retirement income planning. The Working Group believes that
the recommendations for clarity and relief are applicable not only to
single-employer plans, but also to multi-employer plans.
The Working Group learned that employees nearing retirement often turn
to their employer for retirement planning advice. Figures show that
anywhere from 55% to 66% of individuals approaching retirement use their
employer for planning guidance. However, there was testimony that only
approximately 40% of plan sponsors offer guidance to employees nearing
retirement.
In providing context to the findings of the Working Group, a review of
96-1 is in order. In Interpretive Bulletin 96-1, the DOL pointed out that
information and materials described in the four graduated safe harbors
detailed within the bulletin merely represented examples of the type of
information and materials that may be furnished to participants without
such information and materials constituting “investment advice” for
purposes of the definition of “fiduciary” under ERISA Sec. 3(21)(A)(ii).
The first of the safe harbors under 96-1 states that providing
information and materials that inform a participant or beneficiary about
the benefits of plan participation, the benefits of increasing plan
contributions, the impact of pre-retirement withdrawals on retirement
income, the terms of the plan, or the operation of the plan that are made
without reference to the appropriateness of any individual investment
option for a participant or beneficiary will not be considered the
rendering of investment advice.
The second safe harbor of 96-1 states that general financial and
investment concepts such as risk and return, diversification, dollar cost
averaging, compounded return and tax deferred investing, historical rates
of return between asset classes based on standard market indices, effects
of inflation, estimating future retirement needs, determining investment
time horizons, risk tolerance, provided that the information has no direct
relationship to investment alternatives available under the plan.
The third safe harbor of 96-1 allows asset allocation information to be
made available to all participants and beneficiaries - providing
participants with models of asset allocation portfolios of hypothetical
individuals with different time horizons and risk profiles. These models
must be based on accepted investment theories and all material facts and
assumptions on which the models are based must be specified, and
disclosures are mandated.
The fourth safe harbor of 96-1 allows interactive investment materials
such as questionnaires, worksheets, software and similar materials that
provide participants a means of estimating future retirement income needs,
provided that requirements similar to those for asset allocation (above)
are met.
The “safe harbors” are accumulation tools. Safe harbor treatment
applies regardless of who provides the information, how often it is
shared, the form in which it is provided (e.g. writing, software, video or
in a group or one-on-one) or whether an identified category of information
and materials is furnished alone or in combination with other identified
categories of information and materials.
Further, in IB 96-1, the DOL stated that there may be many other
examples of information, materials and education services which, if
furnished to participants would not constitute the provision of investment
advice. Accordingly, the DOL advises no inferences should be drawn from
the four graduated safe harbors with respect to whether the furnishing of
information, materials or educational services not described therein could
constitute the provision of investment advice. The DOL cautions that the
determination as to whether the provision of any information, materials or
educational services not described in 96-1 constitutes the rendering of
investment advice must be made by reference to the criteria of Labor Reg.
Sec. 2510.3-21(c)(1). That regulation establishes the criteria for deeming
the rendering of investment advice to an employee benefit plan.
Specifically, investment advice is rendered where recommendations are
provided as to the advisability of investing in particular vehicles and
whether the person has indirect or direct discretion to implement such
advice.
The Working Group believes that the Department of Labor should provide
guidance in the nature of that provided in IB 96-1 in the context of
distributions to DC plan participants. Such guidance would identify
general standards allowing plan sponsors and other fiduciaries to
differentiate between education and advice. This would allow plan
fiduciaries to provide useful information to participants and
beneficiaries at or around the time they commence benefit distributions
without incurring the additional liability that would accompany advice as
opposed to education. Such education would provide tools for participants
and beneficiaries to make informed decisions regarding accumulated plan
wealth that may have to last until death. Among the areas that could be
covered in such guidance are:
-
Education on tax consequences of distribution alternatives;
-
Education on typical income needs of retirees for housing, food,
dependents and medical expenses and how their plan benefits can serve
these needs; and
-
Education on how to allocate assets among investment alternatives
post-retirement and the consequences of spending down principal.
Annuities as a Distribution Option
The Working Group does not believe that life only, joint and survivor
and period certain annuities should be mandatory options offered in
defined contribution qualified retirement plans in addition to existing
options such as lump sum distributions and other forms of account balance
liquidation. The Working Group believes that the selection of an annuity
provider is a fiduciary act and, as such, is subject to ERISA’s
fiduciary requirements of loyalty and prudence. The Working Group also
believes that the Department is correct, including in the context of a
defined contribution plan, that cost can never justify the selection of an
unsafe annuity provider. The Working Group believes that action should be
taken by the Department to clarify and expand upon the issues presented in
Interpretive Bulletin 95-1. The Working Group contends that the DOL should
neither impede nor restrict the use of benefit distribution annuities for
retirement income streams by participants. The Working Group believes that
further action is required for plan sponsors to rely on 95-1 rather than
continue to interpret 95-1. The Working Group believes that further
clarification and expansion of IB 95-1 is important not only from a
defined contribution context but also in a broader context of the purchase
of terminal funding annuities in a defined benefit plan context. Finally
and probably most important – the Working Group believes that the proper
standard for “safest available” is one that focuses on the fiduciary’s
conduct and here the required conduct would be for the fiduciaries to keep
the interests of beneficiaries foremost in their minds, taking all steps
necessary to prevent conflicting interests from entering into the
decision-making process.
The actual requirement of IB 95-1 is that a fiduciary duty is
discharged where “fiduciaries choosing an annuity provider for the
purpose of making a benefit distribution must take steps calculated to
obtain the safest annuity available, unless under the circumstances it
would be in the interests of participants and beneficiaries to do
otherwise.” There are a couple of touchpoints to this fiduciary
requirement. First, the Courts have viewed the reference to “steps” to
be viewed as a procedural prudence approach though this standard hasn’t
been referred to as such. Second, there is recognition in the standard
that the safest annuity might not always be the best one.
In 95-1 the Department recognizes that in certain circumstances it may
be in the best interest of the participants and beneficiaries to select
other than the safest available annuity. To quote from the Bulletin: “Such
situations may occur where the safest available annuity is only marginally
safer, but disproportionately more expensive than competing annuities, and
the participants and beneficiaries are likely to bear a significant
portion of that increased cost.” The Bulletin contrasts situations where
a fiduciary might choose to purchase other than the safest available
annuity in order to “ensure or maximize a reversion of excess assets
that will be paid solely to the employer-sponsor in connection with the
termination of an over-funded pension plan” and indicates that in those
circumstances that choice would breach the fiduciaries’ duty of loyalty.
Finally, 95-1 directs that, even when it is in the interest of the
participants and beneficiaries for the fiduciaries to consider the cost of
the annuities as one of the selection criteria, no consideration can
justify the purchase of an unsafe annuity.
The most direct criticism of the DOL standard came in an opinion by the
Fifth Circuit where the court accepted the Department’s characterization
of the duty of prudence regarding the nature of the investigation required
in the selection of annuity providers (Bussian v. RJR Nabisco Inc., 223
F.3d 286, (5th Cir. 2000).
The court, however, rejected the Department’s characterization of the
duty of loyalty requirements. It recited some language that is widespread
in duty of loyalty cases; namely that decisions must be “made with an
eye single to the interests of the participants and beneficiaries.” Id.
at 298.
According to the court the difference between its standard and the
Department’s standard is that the Department’s standard “focuses on
the quality of the selected annuity.”
The bottom line is that there is ambiguity in the standard that applies
to choosing an annuity provider. It is not merely a question as to the
meaning of IB 95-1’s “safest available annuity” standard. It is not
at all clear that it is even the standard that will be applied by the
courts to evaluate a plan sponsor’s choice.
The requirements of prudence do not seem to vary regardless of the type
of plan involved (defined contribution or defined benefit), and the
requirements of prudence do not seem to be a problem for sponsors to
understand and accept. But, the duty of loyalty in a defined benefit plan
has to confront the inherent conflict of interest related to purchasing
annuities for participants when lower cost is more favorable to plan
funding. There is no such obvious moral hazard in the selection of an
annuity provider for a defined contribution plan.
The Working Group believes that the selection of an annuity provider
for purposes of benefit distribution (whether upon separation from
service, retirement or termination of a plan) is a fiduciary decision
governed by ERISA. Therefore, in choosing an annuity provider for the
purpose of making a benefit distribution, fiduciaries must act solely in
the interest of participants and beneficiaries and for the exclusive
purpose of providing benefits to the participants as well as defraying
reasonable expenses of administering the plan. It is also the opinion of
the Working Group that the language of IB 95-1 as it relates to the “safest
available annuity” has resulted in the Bulletin causing concerns of
fiduciary liability among sponsors. Specifically, the Working Group
believes that 95-1 provides for prudent procedure in the selection of an
annuity. However, the “safest available” language has created an
outcome based view of 95-1 instead of the prudent methodology at the time
of annuity selection. The Working Group believes that the Department of
Labor should undertake to clarify the prudent procedures for annuity
selection and, if any, the prudent procedures for ongoing monitoring after
an annuity purchase.
Phased Retirement
The Working Group did not receive enough testimony to form any opinion
or make any recommendations to the Department of Labor regarding “phased
retirement.” However, most of the limited testimony pointed out that
ERISA rules permitting distribution of plan assets after age 59½ provide
opportunities for phased retirement.
Summary of Mr. David Wray, President, Profit Sharing/401(k) Council of
America, July 8, 2005
David Wray is the Executive Director of the Profit Sharing Council of
America and a former chair of the ERISA Advisory Council. Mr. Wray stated
that 55.3% of the respondents to his trade organization’s 2003 Annual
Survey provide special education programs to help retiring employees
determine how to manage defined contribution plan accumulations. This “education”
manifests itself as either one on one consultation with financial
planners, software modeling programs or pre-retirement counseling
seminars. Mr. Wray stated that plan sponsors and financial service
companies are being driven by the marketplace to provide communications,
education and advice solutions. He stated that there is a commitment by
employers to successful defined contribution outcomes, but asked if there
is any “measurement” of post-retirement education, Mr. Wray stated
that he didn’t have a good sense of what is happening in the “lump-sum-rollover-IRA
world.” Mr. Wray stated that the defined contribution marketplace to
this point in time has been a marketplace focused on accumulation of
assets but that as the baby boomers move into retirement there will be a
focus shift from accumulation to management of distributions. Mr. Wray
stated that it would be up to the Council to “determine how to measure
success.”
To the issue of making commercial annuities optional in defined
contribution plans, Mr. Wray believes that a commercial annuity optional
form of income stream could harm the defined contribution system. He
believes that the government requires compelling reasons for mandating the
annuity option, and that such compelling reasons do not exist at this
time. Mr. Wray stated that the case for IRA rollovers that end up
purchasing annuities is inconclusive. Mr. Wray favors rollovers to IRAs
while keeping the annuitization of the balance or a portion of the balance
at some point in the future a.k.a. “post-employment.” Mr. Wray also
stated that there is no evidence that participants who choose not to
purchase annuities through a defined contribution plan end up running out
of money or harm themselves during their retirement years. Mr. Wray
maintains that mandating annuity options would stifle innovation. Mr. Wray
cited an innovative annuity design from an insurance carrier that provides
attention to risk tolerance, a guaranteed income stream and period of time
to fund the annuity. Such annuities don’t currently exist for most plan
options. Mr. Wray’s point is that government intervention by statute,
regulation or guidance/opinion will burden plan sponsors with additional
compliance measures.
There wasn’t any substantive discussion pertaining to phased
retirement, although the PSCA Annual Survey cited by Mr. Wray disclosed
that 75% of sponsors allow withdrawals at age 59½ while the participant
continues working.
Summary of Ms. Kelli Hueler, President, Hueler Companies, July 8, 2005
Ms. Hueler’s firm, The Hueler Companies, has an educational tool that
plan sponsors can offer retirees and beneficiaries who wish to purchase
annuities at competitive and transparent prices. Clarification by the
Department of Labor of its Interpretative Bulletin 95-1 would allay plan
sponsors’ concerns in using such educational tool.
The mission of Hueler Companies is to empower retirees via an
educational tool made available through the plan sponsor that can be used
by the retiree to purchase annuities for retirement purposes. Ms. Hueler
realized that many defined contribution plans do not offer annuities and
yet retirees need to be protected against the investment and mortality
risks inherent in a lump sum amount. She has nine insurers working
together to provide institutional pricing (which results in a 4 – 9%
difference in the quote of an individual annuity, if it even is available)
and an “apple to apple” comparison of annuities. Due to DOL’s
Interpretive Bulletin 95-1, which requires employers who offer a selection
of annuity providers to provide the “safest available” annuity,
employers have been hesitant to recommend annuity providers to retirees.
The DOL’s Interpretative Bulletin provides an outcome based determination
for employer liability purposes, in contrast with ERISA’s normal
fiduciary determination which is process driven.
To resolve the employer liability concerns, the Hueler Companies’
recommendation is for the plan to offer a lump sum rollover option, but
then provide retirees with the educational tool they will need to decide
whether and how to annuitize. The disadvantage of the current system is
twofold: if the defined contribution plan offers annuities, it is a
decision made at retirement which fixes the retiree into a single type of
annuity; and if the defined contribution plan doesn’t offer annuities,
the individual annuity market is costly and does not afford the retiree
with an “apple to apple” comparison of the variety of annuity quotes,
making selection difficult.
As a result, Hueler Inc. has an educational tool with nine insurers who
have agreed to offer competitive annuity quotes at group rates over the
retiree’s retirement – hence, it would no longer be an irrevocable
decision at retirement and part of the retiree’s lump sum amount could
be annuitized over a variety of different terms. Also the insurers agreed
to provide quotes on an “apple to apple” comparison, affording
retirees with an accurate decision as to the relative costs. The end
result was to have the retiree select the provider and purchase the
annuity with part or all of his/her lump sum rollover. This provides the
best of both worlds – the employer is not selecting the provider and
thus doesn’t have fiduciary exposure and the retiree does not have to
decide at the time of retirement to annuitize all of his/her benefits. In
fact, Ms. Hueler’s experience is that retirees take three to four years
after retirement before deciding whether to annuitize part or all of their
rollover proceeds.
The Advisory Council asked Ms. Hueler whether clarification of the DOL’s
Interpretative Bulletin 95-1 would be helpful in promoting tools such as
the one Hueler Inc. has developed. “Absolutely”, was the response. The
market place is able to develop effective educational tools for retirees
to protect themselves from the investment and mortality risks inherent
with a lump sum amount. Obviously using the employer as the intermediary
for the dissemination of such tools is cost productive; however, any legal
impediment imposed on employers providing for such dissemination will
limit the growth of such tools. Hence, the DOL clarification as to the
employer’s liability would be extremely helpful.
Summary of Mr. Jerry Bramlett, President, The 401k) Company, July 8,
2005
Jerry Bramlett is the President and CEO of The 401(k) Company, a
third-party administrator that serves the small to mid-size plan market.
Mr.Bramlett began his testimony by stating that from a visceral experience
with plan participants, investment education has failed. Mr. Bramlett said
that the risk management process for “in-retirement” management of a
defined contribution account asset must balance and address 4 different
risks – longevity risk, market risk, draw-down risk and inflation risk.
Mr. Bramlett believes that investment education has failed because it is a
“process” and not a “product.” He believes that success for
participant directed investment management hinges upon simplified and
automated approaches.
In order to provide simplified and automated approaches, Mr. Bramlett
believes individual advice is not a viable option because of the
uncertainty, subjectivity and unpredictability of the process.
Consequently, he believes that software is the better answer as a tool for
participant directed account balance management. Mr. Bramlett also
believes that commercial annuity options create certainty, are objective,
and mitigate the four risks of longevity, market, draw down and inflation.
Annuities are predictable. The reason Mr. Bramlett favors software asset
allocation solutions and annuities is because the experience of his
company shows that plan participants respond to product solutions better
than process solutions.
While Mr. Bramlett focused on the product v. process for a great deal
of his testimony, he did speak to the public policy issues. Mr. Bramlett
spoke to the possibility of tax incentives (exclusion from income) for annuitization. He believes tax incentives create interest and demand. He
also stated that fiduciary relief for the annuity option in a defined
contribution plan is a necessity to reduce “pension leakage.”
Summary of Mr. Kent Buckles, President, Invesmart, July 8, 2005
Mr. Kent Buckles is the President and CEO of Invesmart, Inc. a national
full-service qualified retirement plan recordkeeper and investment
advisor. Invesmart has approximately 3,600 clients, 300,000 participants
in those clients and approximately $10 billion assets under management.
Approximately 60 percent of Invesmart’s clients are defined contribution
plans.
Mr. Buckles noted the shift from defined benefit plans to defined
contribution plans. In his opinion, participants perceive defined
contribution plans differently from defined benefit plans. Participants
view defined benefit plans as arrangements producing a stream of income at
retirement. Participants view defined contribution plans as savings
vehicles whose assets can be tapped before retirement. He said that part
of the selling point of defined contribution 401(k) plans is that a
participant’s savings can be used before retirement. Many of these plans
have provisions for plan loans, hardship distributions and in-service
distributions at and after age 59½. He believes it would be unfair to
change the rules to restrict distributions to retirement. Such a
restriction would be contrary to the expectations of participants who are
now contributing to these plans and it would discourage the entry of new
participants.
Mr. Buckles also said that more than 50 percent of the participants
among his clientele are very uncomfortable with making investment
decisions. They are unwilling to commit time to learning about investing
their plan accounts. He concludes that investment education has failed.
Self-help investment tools are only used by about 5 percent of
participants. Participants want someone to tell them how to investment
their plan assets. He said that 60 percent of participants would let
someone else manage their investments when that option is available.
On the question of annuity distribution options in defined contribution
plans, he reiterated that there is not a demand from plan sponsors or from
participants for such options. He said that very few of his clients want
annuity distribution options. Mr. Buckles contends that the current
options available under defined contribution plans are effectively
communicated because they are mostly lump sums or installments. Mr.
Buckles does not think that investment advice can be a “product” or
“commoditized.” He stated that no education is effective when provided
on/by forms. Participants also lack an understanding of annuities. Mr.
Buckles noted that annuities are a tough sell in the present low interest
rate environment.
Small distributions – those under $10,000 – are usually cashed out.
This is generally attributable to the turnover of younger workers in a
mobile workforce. Additionally, participants who move to a new employer
may not trust their former employer with the stewardship of their savings
plan accounts. Larger account balances are more likely to be rolled over.
In response to a question, Mr. Buckles said that he did not have data
on whether the employees of today’s more mobile workforce have 401(k)
accounts with their former employers.
Mr. Buckles said that although this working group is studying defined
contribution plan distributions the most important issue is still the
accumulation of savings. He said there are about 65 million employees in
the small market (less than or equal to 500 employees). Only 15 million of
these employees have access to 401(k) plans. Therefore, more employers
need to sponsor plans. Additional new regulatory requirements would hinder
the creation of new plans, which would be a detriment to the need to have
more employees in the small market have access to plans.
Mr. Buckles answered the questions the working group sent to him before
his testimony as follows:
-
Are retirement and distribution options of defined contribution
plans effectively communicated? He said they are effectively communicated.
Nonetheless, even when a plan offers a simple set of distribution options
they can result in lengthy paper explanations and election forms.
-
Should annuities be a mandatory form of distribution option in
defined contribution plans? He said that there should not be mandated
distribution options. Mandates would cause employers to be reluctant to
start or continue sponsoring plans.
-
Are there adequate phased retirement options in defined contribution
plans? He said there are adequate options under the present in-service
distribution options allowed under law.
He had several additional suggestions beyond the questions posed by the
working group.
He said that there is a need to encourage the development of programs
to assist retirees to manage their account balances in retirement. A level
playing field among different providers should be maintained so that one
type of investment is not preferred over another.
He also said that cash outs should be discouraged. He noted that this
might be hard to actually accomplish although he offered a suggestion that
rollovers could be required before allowing a cashout.
He again noted the importance of accumulating retirement savings. He
responded to a question on whether the Department of Labor should mandate
the availability of lifecycle funds as investments by saying that a
mandate should not be made. He would endorse a non-binding recommendation
for the inclusion of such investment options.
In response to other questions, he said that he cannot generalize on
the extent of a paternalistic attitude among plan sponsors in the small
employer market. He also estimated that about 10% of separations among his
clientele are due to retirement. He thinks that percentage is likely to
increase as the baby boomers begin to retire, but he could not opine as to
how much that percentage might increase.
Summary of Ms. Catherine Wilbert, Assistant General Counsel,
Northwestern Mutual Life Insurance Company, representing American Council
of Life Insurers, July 8, 2005
Catherine Wilbert is Assistant General Counsel & Assistant
Secretary of the Northwestern Mutual Life Insurance Company. Ms. Wilbert
has over 15 years experience advising on qualified retirement plans from a
sales, service and compliance perspective.
Ms. Wilbert’s testimony spoke initially to the fact that defined
contribution plans have more than doubled while defined benefit plan have
been reduced by 66% in the 20 year period from 1980 to 2000. The Financial
Research Corporation has estimated that rollovers from mutual funds held
inside plans will double to $400 trillion by 2010. Most of the rollover
accounts will require the individuals to manage the money themselves over
their lifetime. Americans are also living longer, making longevity risk,
market risk, and draw-down risk of a lump sum distribution very
significant risks to individual retirees. EBRI research shows that 15
percent of
the 64-74-year old cohort had lost 50 percent or more of their total wealth from 1992 to
2002, and about had 30 percent had lost 50 percent or more of their financial wealth. Wilbert pointed out that this means less money to sustain
an increasing life expectancy
Wilbert suggested that for participants to hedge this type of
catastrophic investment loss and to prohibit pension leakage, immediate
lifetime annuities should be an optional form of benefit from defined
contribution plans. She doesn’t think that plans should be mandated to
require annuitization (fully or partially). Wilbert maintains that
mandating the annuity option would increase plan costs. Making annuities
an optional benefit is a viable alternative provided that regulatory
relief from the “safest available” standard in DOL IB 95-1 is
clarified or modified. Ms. Wilbert also points out that annuity pricing is
done in qualified plans on a gender neutral basis.
Ms. Wilbert clarified that annuities were removed from defined
contribution plans when the Sec. 411(d)(6) anti-cutback rules were
modified, i.e. the elimination of an annuity option was available if the
defined contribution plan provided a lump sum option.
Wilbert sees the same need for clarification to take place with regard
to the “distribution phase” that is the heart and soul of whether
retirement distribution communications are effective. She would like the
DOL to expand on IB 96-1 as it relates to the delineation of investment
education, and advice. While 96-1 was geared to the “accumulation phase”
of retirement planning she would like to see it expanded and applied to
the “distribution phase” as well. For instance she supports an “annuity
calculator” that converts a lump sum to a monthly benefit as an
educational tool.
She was the only witness to provide footnoted evidence of her factual
claims.
Summary of Kenneth Kent, Consultant, Cheiron U.S., representing the
American Academy of Actuaries, July 8, 2005
Kenneth Kent is the Vice President of the Pension Practice Council of
the American Academy of Actuaries. Mr. Kent started his testimony by
providing the perspective from which an actuary would view the inquiry of
the Working Group. Specifically, Mr. Kent stated that actuaries are
concerned with financial risks and typically deal with such risks through
the concept of pooling. Mr. Kent stated that in retirement there are two
risks – investment and longevity. Mr. Kent contends that the actuarial
profession’s concern about retirement distributions is in the incentives
that drive economic choice. He maintains that such incentives should be
level and fair between alternatives. Mr. Kent spoke to the issue of the
shift from defined benefit to defined contribution plans over the last 20
years.
Mr. Kent contends that the risk of living off a lump sum means that
most Americans will feel obligated to continue to save during retirement
or overestimate their investment ability or underestimate their longevity.
Mr. Kent believes that today the opportunities to protect plan
participants from either outcome is not inexpensive. To address the
financial security of retirees, pooling of risk becomes important in terms
of cost management and distribution options should focus on pooling. In
the end, Mr. Kent stated that the incentives to remove participants from
risk pooling and manage money on their own will unequivocally increase
society’s costs. Mr. Kent maintains that incentives, if provided, should
be for all annuity income provided by the employer sponsored plans as well
as though individual annuitization. He believes that annuitization meets a
fundamental societal need in securing retirement for the elderly. In the
final analysis, Mr. Kent believes that a lower-risk model is needed and
the crux of achieving such a goal is the cost of securing longevity and
investment risk. Investment education can only go so far. Likewise, not
everyone is going to be risk averse and want annuities.
Summary of Ms. Dana Muir, Professor, Ross School of Business,
University of Michigan, September 22, 2005
Professor Dana Muir is a faculty member of the Stephen M. Ross School
of Business at the University of Michigan. Her research interests are
employment law, especially health care plans and pension benefits; plan
investment issues; and securities law. In 2002, she was cited by the
Supreme Court for her research in important decisions on ERISA rules.
Professor Muir is a former member of the ERISA Advisory Council.
One of the questions facing this Working Group is whether certain
annuity options should be mandatory under defined contributions plans. The
DOL’s Interpretative Bulletin 95-1 (referred to as IB 95-1) has put a
chilling effect on the selection of annuity providers by plan sponsors.
This is a result of the DOL’s interpretation of the plan sponsor’s
(who is a plan fiduciary) duty of loyalty.
In March of 1995, the DOL issued IB 95-1 in which it stated specific
fiduciary duties applied to a defined benefit plan sponsor in selecting
annuity insurers for payment of benefits to ERISA plan participants and
beneficiaries. There was a historic reason for this bulletin. During the
1980s, there were more than 1,600 terminations of surplus defined benefit
plans resulting in reversions of $1 million or more, affecting
approximately 1.8 million employees. Some plan sponsors purchased
annuities from risky companies, resulting in higher reversions for the
sponsor. The insurers later went into conservatorship and the participants
sued.
In announcing the basic fiduciary standards for plan sponsors in
purchasing annuities for participants under a defined benefit plan in IB
95-1, the DOL enunciated two basic standards:
-
The fiduciary duty of loyalty which required the fiduciary to “take
steps calculated to obtain the safest annuity available, unless under the
circumstances it would be in the interests of the participants and
beneficiaries to do otherwise” and
-
The fiduciary duty of prudence which required an “objective,
thorough and analytical search for the purpose of identifying and
selecting providers from which to purchase annuities.” The IB then lists
six specific factors to consider in such an evaluation.
Professor Muir analyzed the DOL’s interpretation of the
duty of
loyalty in IB 95-1:
-
The language does not state that the plan sponsor must choose the
safest annuity; rather it says it has to take steps in an attempt to
choose the safest annuity.
-
The standard has an “unless” clause to recognize that there are
situations in which it may not be right to choose the safest annuity. This
is in recognition of the statutory standard that the fiduciary’s duty of
loyalty requires it to act in the best interests of participants and
beneficiaries. For example, there may be situations when the safest
available annuity is only marginally safer but disproportionately more
expensive than competing annuities and the participants and beneficiaries
are likely to bear a significant portion of the cost.
-
This is an interpretation of a fiduciary’s duty of loyalty.
Professor Muir compared the DOL’s interpretation of the duty of
loyalty with the duty of prudence. The latter duty is process driven –
i.e., the plan sponsor is to conduct an objective, thorough and analytical
search for the purpose of identifying and selecting annuity providers.
Unfortunately, plan sponsors have interpreted the first duty – the duty
of loyalty – to require the purchase of the best available annuity, even
though that language is not contained in IB 95-1. Such an interpretation
is outcome determinative and therefore extremely difficult to satisfy. As
a result, plan sponsors of defined contribution plans would be reluctant
to provide annuities and to select the annuity provider if they were not
required to do so.
No court has adopted the DOL’s first fiduciary duty of loyalty
standard. Courts have rejected and either adopted a new standard or did
not state a standard. The most direct criticism of the DOL standard is
found in the Fifth Circuit opinion, in Bussian v. RJR Nabisco Inc., 223
F.3d 286, 300 (5th Cir. 2000). The DOL filed an amicus brief in that case
and the court accepted the DOL’s interpretation of the prudence
standard. In interpreting the fiduciary’s duty of loyalty, the court
held that the fiduciary’s decision would be judged “with an eye single
to the interests of the participants and beneficiaries.” If the
fiduciary kept its focus on the interests of participants and
beneficiaries foremost in its minds, taking all steps necessary to prevent
conflict interests from entering into the decision-making process, it
would satisfy the duty of loyalty. Such a standard focused on the conduct
of the fiduciary, not the outcome of the decision.
The Fifth Circuit criticized the DOL “safest annuity standard” as
it was not defined. In addition, the characteristics of the annuity that
are supposed to be judged by this standard were not defined. For example,
one annuity provider may be safer if you look to its investments, whereas
another may be safer if you look to its history. The Fourth Circuit has
also rejected the DOL’s interpretation of the duty of loyalty but did
not set forth another standard.
Professor Muir recommended that the Working Group use this occasion to
recommend to the DOL to reconsider its position in IB 95-1. She outlined
three different choices:
-
Keep the current interpretation, but clarify on what safest means
and provide some guidance to plan sponsors to decide what is safest.
-
Keep with the standard, but concentrate on the process aspect of
selecting the annuity provider; emphasis on the steps to determine the
safest, not the outcome of who is the safest.
-
Recommend the alternate standard posed by the Fifth Circuit.
Under the third choice, Professor Muir further explained the Fifth
Circuit’s standard. The fiduciary’s duty of loyalty derives from trust
law – an obligation to put the interests of the participants and
beneficiaries first, before that of the fiduciary, and then let the
outcome be what it is. If the fiduciary is operating under a conflict of
interest, it should minimize its effect. In the defined contribution
context, selection of the annuity provider has no obvious moral hazard, as
it could in the defined benefit context (i.e., reversion of surplus assets
to the sponsor). Hence, the duty of loyalty could be judged differently in
the defined contribution context than in the defined benefit context.
While the conflict of interest can be minimized in the annuity
selection context, Professor Muir contrasted the conflict of interest in
the claims adjudication context (an issue that another Working Group is
considering). In the claims adjudication context, where the insurance
company both pays the benefits and makes the decision on benefit
eligibility, the insurer has a very strong incentive in inappropriately
deny claims. The lack of remedies for injured participants and
beneficiaries insulates the insurer from any real financial risk that
results from this conflict of interest. That just simply is not the case
in the annuity selection decision by a defined contribution sponsor.
Therefore what would be required by the fiduciary operating under a
conflict of interest in a claims adjudication context would be different
than what would be required in the annuity selection decision.
As an aside, Professor Muir remarked that plan sponsors were not too
concerned about annuity products simply because their participants were
not interested in purchasing them. Thus, the potential fiduciary liability
associated with the selection of the annuity provider may not appear to be
the problem. In addition, annuities are negatively perceived. If the DOL
wishes to encourage sponsors to offer annuities, participants and
beneficiaries are going to have to be educated through communication
efforts on their value.
Summary of Ms. Stacy Schaus, Practice Leader – Personal Financial
Services, Hewitt Associates, September 22, 2005
Ms. Schaus testified that retirement plan distribution options are
effectively communicated to plan participants. She highlighted the fact
that participants already receive a summary of material features for all
forms of optional forms of distribution, and that they may receive
distribution guides from employers and seminar booklets as the most common
forms of employer communication. Ms. Schaus believes that plan sponsors
are providing a great deal of information about plan options, in some
cases more than the participant needs to know, but that the participants
still need more help with broader financial education that goes beyond
plan options. She maintains that most education – even as it applies to
distribution options – is focused on the accumulation or portfolio
management side of the equation. Ms. Schaus testified that retirement
income management can be complex and requiring educated decision-making
and should encompass a more “holistic” financial planning approach.
Yet, employers, she cited, stop short of providing holistic financial
advice because of the fear of overstepping the boundaries set by existing
Department of Labor guidance in Interpretive Bulletin 96-1. Specifically,
employers are afraid of being classified as fiduciaries and being held
accountable for offering investment advice rather than education. She
encourages providing more guidelines and encouragement to plan sponsors
for offering holistic retirement financial planning guidance and advice.
Ms. Schaus’ view is that more employer support should help increase
employee understanding of retirement and distribution options and
ultimately help improve individual management of retirement plan assets.
As to the issue of commercial annuities being mandatory options in DC
plans, Ms. Schaus went on the record with the view that there should not
be a mandate for annuities as an optional form of benefit. Ms. Schaus
cited lack of interest on the part of participants, competitively priced
annuities can be made available outside plans (citing Ms. Hueler’s
company as an example of her point) and finally Ms. Schaus reiterated the
regulatory stumbling blocks to annuities by reaffirming the positions of
Professor Muir. This is not to say that annuitization is bad or an
inadequate financial planning technique, Ms. Schaus pointed out. In fact,
partial annuitization can be an effective income stream management hedge,
she testified. In the end, Ms. Schaus recommended that regulatory burdens
currently existing should be lessened or alleviated so that access to
annuities can be offered by an employer as a service to employees. She
advocated the use of a price-advantaged platform as opposed to a fiduciary
selecting a single insurance company as annuity provider.
When it came to phased retirement, Ms. Schaus believed that by removing
the impediments for annuitization and providing holistic financial
planning for retirement, employees can enhance their phased retirement
dreams and needs. In her opinion, defined contribution plans need to allow
participants access to their defined contribution assets at age 59½, if
they do not already do so. Then the participant phasing into retirement
can rollover and annuitize if desired.
Summary of Keith Hylind, Vice President, Metropolitan Life Insurance,
September 22, 2005
Mr. Hylind testified that the primary risks that people face in
retirement are investment risk, inflation risk and longevity risk.
Longevity is the greatest retirement risk retirees face, because it is the
only risk that they cannot manage on their own.
He said, market risk can be alleviated somewhat through asset
allocation and inflation risk can be addressed by investing a portion of
assets in growth equities. Based on studies, American workers will live
longer in retirement than any preceding generation. We need to make sure
that income lasts as long as we do.
He mentioned the shift from defined benefits to defined contribution
plans. He said that the major shortcoming of defined contribution and
401(k) plans in particular, as compared to a defined benefit plan, is that
these plans do not generate life long income for the individual
participant. He quoted the Government Accountability Office report that
analyzed the types of payouts workers actually received at retirement from
defined benefit and defined contribution plans.
In the period of 1992 to 2000, the GAO found that retirees in
increasing numbers are selecting benefits in a form other than those that
guarantee life-long income payments like annuities. Also, an increasing
proportion of most retirees choose to directly roll over lump sum benefits
into IRAs or leave their assets in the pension plan. The report went on to
state that a growing percentage of retirees who reported having a choice
among benefit payout options chose payouts other than annuities.
He quoted an analysis conducted by EBRI supporting the GAO findings.
All indications are that when given a choice to replicate the benefit
forms provided by traditional pensions or annuities, few individuals are
making that choice. He said participants do not understand how much the
retirement savings will translate to in terms of a stream of income.
Participants will be largely left on their own to replicate security
previously provided by defined benefit plans, security that was created by
teams of actuaries, pension experts, investment professionals, benefit
consultants, accountants, attorneys, and by the government through the
protection offered by the PBGC.
Stripped of this expertise and protection, he believes employees need
help that most employers are unable, or are unwilling, to provide. As a
solution he thinks income annuities can replicate the security of defined
benefit plans by generating lifelong income benefits.
Income annuities help people manage longevity risk and they allow
conversion of savings and other asset accumulation into income streams
guaranteed to pay out for the life of the individual, a spouse, or another
joint life. He states that no other investment can make this guarantee. He
discussed innovations of a wide choice of payout options, which can be
tailored to meet the life needs of an individual. Examples are joint life
annuities, joint survivor annuities, annuities for a specified duration,
life annuities with a guaranteed payment, annuities with inflation and
option riders, some of which are tied to the CPI, while others provide a
flat percentage rate each year and a list of other types of annuities.
He testified that if the goal of defined contribution plans is to help
individuals retire in relative financial comfort, income annuities should
be prominently promoted as income distribution vehicles. He stated only
two percent of retirees select annuities at the time of distribution. He
quoted his Met Life study which looked at the income and spending patterns
in retirement of Americans between the ages of 59 and 71. It revealed a
strong correlation between guaranteed income from pensions and annuities,
and an increased feeling of comfort in retirement. Retirees who had
regular income from both a pension and an annuity were three times as
likely as those with neither to say that retirement was much better than
they expected it would be.
On the subject of communications, some employers will communicate to
participants only when necessary, and provide only the bare minimum,
things such as summary plan descriptions, plan amendments, et cetera.
Other employers take a different approach and offer educational outlets to
participants in addition to communicating issues relating to plan
operations.
He discussed the importance of the effect of education and quoted a Met
Life survey of 1,200 men and women between the ages of 56 and 65, and
within five years of retirement. The survey was comprised of 15
multiple-choice questions designed specifically to assess their knowledge
of retirement income issues. The results were very poor. Ninety five
percent of those surveyed failed the test; the average score was 33
percent. In his opinion the results of this survey confirmed: Retirees and
near-retirees are uninformed and unprepared for the financial realities
that they will face in retirement. He believes that the first step in
improving education to plan participants is educating the plan sponsor.
He stated that Met Life believes that the Department of Labor can
provide clarification and changes that will protect employers from
incurring fiduciary liability when providing retirement plan information
and advice. And that there is a perception among employers that providing
information is going to present a greater risk than if they provided
nothing at all. To the extent that the Department of Labor could provide
something that was generic, something that was educational, something that
was understandable and useful to the plan participant, that did not
contain the biases, that would be a home run in his opinion, and he thinks
that employers would absolutely and positively welcome that categorically.
In addition to that, he stated the Web site that the Department of Labor
has is very good. He encourages DOL to more prominently display income and
retirement income management on that site. He stated that people learn
differently. Insurance and financial services firms will work with
employers to provide educational support in the media that meets the plan
sponsor and the plan participant needs. The DOL can also address
retirement income education prominently on its Web site, again, providing
information and tools within context is imperative.
Finally, the DOL could issue guidance regarding the provision of
investment advice to plan participants that would alleviate the plan
sponsors concerns regarding fiduciary liability.
Summary of Trisha Brambley, President, Resources for Retirement, Inc.,
September 22, 2005
Ms. Brambley heads a consulting firm that primarily serves the
mid-market (up to 5,000 employees in a single plan). The basis of Ms.
Brambley’s testimony were facts and figures from surveying 20 of her
client plans (covering approximately 20,000 employees).
Fifty-five percent of those surveyed thought that “financial
counseling” would make it easier for plan participants to effectively
handle their account balance distribution. Not a single other answer
received more than 11 percent. However, when asked if participants would
pay for such advice or guidance out of their own pocket – 40 percent of
the responses suggested that plan participants would not pay for advice
yet they want one-on-one counseling.
Ms. Brambley’s research showed that when employers were asked whether
annuities should be offered to plan participants as distribution options,
70 percent responded affirmatively. But, they qualified their affirmative
response by saying annuities should be offered “if” they could
distance themselves from the fiduciary concerns, and “if” they could
avoid the administrative burdens of annuities. Much of Ms. Brambley’s
research reviews confusion amongst employers and participants regarding
annuities. For instance, running out of money is the Number One fear about
retirement, and 80% of participants prefer to receive benefits in a form
of regular payments for life. Her research confirms that participants have
a hard time understanding annuities and this lack of understanding creates
a lack of interest by participants.
Ms. Brambley believes that methods can be employed to overcome the
common obstacles mentioned above. She mentioned that education at
enrollment, throughout the accumulation phase, at pre-retirement and at
the time of distribution using seminars, personal illustrations and
one-on-one support. She described “platform companies” that were
confirmed to be of the variety of the Hueler Companies that provide
independent, arm’s length transactions. Ms. Brambley believes that
creating a platform or using a platform of multiple vendors dampens the
fiduciary concerns and can be successfully deployed without added
fiduciary burdens.
Summary of John Kimpel, Senior Vice President & Deputy General
Counsel, Fidelity Investments, September 22, 2005
Mr. Kimpel’s entire testimony addressed the “annuities as mandatory
options issue.” Mr. Kimpel started out by stating that in Fidelity’s
world – “plan leakage” of DC account balances is only about 5%. This
is less than some policymakers believe. He stated that the most used
options in DC arrangements are lump sum distributions and periodic
distributions. Interestingly, Mr. Kimpel stated that even money purchase
pension plan participants (which must be offered joint and survivor
annuity option) elect to receive the account balance in some other
optional form of benefit other than an annuity.
Mr. Kimpel provided some insight into the unpopularity of annuities
from an employer standpoint. In addition to the current regulatory
concerns from a fiduciary perspective, he contends that the qualified
joint and survivor annuity rules discourage plan sponsors from offering
annuities as an optional form of benefit. He cited that the QJSA rules
were complicated and difficult to explain as well as difficult to
administer. Simply put, Mr. Kimpel maintains that annuities require
papered administration of distributions that are otherwise done
paperlessly.
On the other side of the coin, Mr. Kimpel testified that the reasons
annuities are met with a lack of interest by plan participants are because
participants lack education regarding the role and benefits of annuities.
Mr. Kimpel believes that the perceptions and belief systems of most
participants are misinformed and grounded in perceptions and
understandings of deferred annuities rather than income annuities.
Secondly, Mr. Kimpel testified that most of today’s retirees are already
sufficiently annuitized through Social Security. Third, he provides that
traditional annuities reflect the annuitant pool and not the general
population. Fourth, longevity is not the only risk.
Kimpel advocates that annuities should be considered in conjunction
with other sources of retirement income. If annuitization is desired by a
plan participant, the choice of a fixed or variable income annuity should
depend on the retiree’s other source of income as well as the retiree’s
ability to tolerate fluctuation of income. Kimpel stated that Fidelity has
a rule of thumb that no more than 30% of a retiree’s available liquid
assets should be annuitized. The reasons for advocating partial
annuitization rather than full annuitization are based on inflation risk
and the erosion of purchasing power that can occur to a fixed income
recipient. Additionally, interest rate risk creates a reduction in
retirement income from reduced interest rates used in current annuity
purchase rates. Finally, there is the issue of carrier risk. Insurance
carrier insolvency has become an issue in the last 20 years with the
liquidations and rehabilitation efforts of Executive Life and Mutual
Benefit.
Finally, Mr. Kimpel testified to various Fidelity programs that can
generally be stated to provide a more holistic, retirement financial
planning approach. Several times throughout his testimony Mr. Kimpel
alluded to the fact that retirement income planning is geometrically more
complex than accumulation planning.
Summary of Cindy Hounsell, Executive Director, Women’s Institute for
a Secure Retirement (“WISER”), September 22, 2005
Ms. Hounsell testified to the anxiety of people she works with
regarding whether they will have enough money to retire and whether they
will outlive the money they have. Ms. Hounsell stated that there seems to
be a basic need for core information. She defined core information as
being a need for rudimentary retirement and financial education. How to
make individual savings last a lifetime is a fundamental issue about how
individuals want to receive income from an asset pool. Transferring the
investment risk or self-management or will it be a blend? Most people,
according to Ms. Hounsell cannot even answer that question much less
anything about how to execute on it.
Ms. Hounsell maintains that because each individual’s circumstances
and preferences are different – effective communication of options and
retirement income planning is complex. Consequently, Ms. Hounsell believes
that most people take lump sum distributions because it is simple and easy
to understand without the need to make another decision – for the
immediate moment. Like other witnesses, Ms. Hounsell stated the current
prevalent focus on accumulation rather than income planning as being
something that has to change from vendors and plan sponsors and
regulators.
Ms. Hounsell stated that she was in favor of having annuities utilized
more by plan participants but she stops short of endorsing annuities as
mandatory options. To make annuities mandatory options, she believes would
be fought vigorously by the employer pension lobby because it would be
viewed as costly, burdensome with a potential for liability. In the final
analysis, Ms. Hounsell doesn’t see much benefit in adding options as
participants cannot make good use of the options because they lack the
proper guidance, education or planning skills to make the option work
effectively for them. Ms. Hounsell advocates that the Department of Labor
take the lead in establishing educational methods about retirement income
planning.
-
Hereinafter referred to as “the
Working Group”
-
See testimony of Wray, Wilbert,
Kent, Schaus, Hylind, Brambley, Kimpel, Hounsell
-
See testimony of Wray, Wilbert,
Kent, Schaus, Hyind, Brambley, Kimpel, Hounsell
-
See testimony of Schaus
-
See testimony of Wray
-
See testimony of Wray, Bramlett,
Buckles, Wilbert, Kent, Schaus, Hylind, Brambley, Kimpel, Hounsell
|