Employers shouldn’t fret over adding income solutions to their DC plan

With the passage of the SECURE Act, a growing number of plan sponsors and fiduciaries are beginning to explore annuities as a vehicle to provide guaranteed income for their 401(k) plan participants and address longevity risk.  Still, the question of how to appropriately include income-providing solutions within a plan’s offering is proving to be challenging.  In fact, a recent Alight survey found 75% of plan sponsors indicated that fear of fiduciary liability around the selection of in-plan annuity solutions drove their decision to not yet offer them to their participants. 

This no longer need be the case thanks in large part to the impact the SECURE Act and subsequent retirement-themed legislation is expected to have on in-plan income provisions.   In fact, it is the Institutional Retirement Income Council’s (IRIC) belief that this federal regulation is a game-changer, and that eventually plan sponsors will become comfortable implementing some of these new annuity-based income solutions.  To further help plan sponsors and fiduciaries, IRIC recently published several white papers aimed at educating the defined contribution community on retirement income solutions.

The first IRIC paper, Exploring the Process of Adding an Income Solution to Your Retirement Plan, begins by comparing commonly used retirement income solutions: a Social Security bridge strategy, systematic withdrawals, and annuity solutions. 

While each solution has its pros and cons, both for the plan participants and the plan sponsors responsible for their implementation, and while IRIC believes that each solution can provide significant benefits, in the interest of brevity we’ll focus solely on the third option – annuities — which can offer lifetime income guarantees.

Our analysis of the guidance from IRIC (along with a growing number of ERISA attorneys) suggests that meeting one’s fiduciary duty in implementing any income solution is going to turn on the concept of process, process, process. 

Importantly, this process must involve “objective, thorough and analytical” decision making; in other words, throughout the process, the fiduciary must act in a “prudent” manner, which in places may involve engaging industry experts to aid in the process.  

For most plan sponsors, implementing an annuity as an in-plan retirement income solution involves two basic steps: selecting compliant insurers, and selecting the preferred product, both of which we briefly discuss below.

Step 1: Selecting Compliant Insurers

This first step of selecting potential insurance partners has been greatly eased by the SECURE Act, which contains basic requirements that insurers must meet to provide plan fiduciaries protection from future legal action (the “safe harbor”).  These include a license to offer group annuity contracts, regulatory authorization, basic filing and reserve requirements, and the existence of state financial examinations.  These are all relatively easy to document.   But the simple “ticking of these boxes” here does not suffice.  

Rather, fiduciaries must first have engaged in a prudent search to determine which insurers best meet the obligation of providing long-tail income annuity contracts.  This generally involves isolating those insurers with experience in the group annuity marketplace, and which meet certain basic size requirements as regards capital and assets as well as a history of earnings.  This search should be well documented and, if needed, supported by the work of third-party insurance credit experts.

Step 2:  Selecting the product type

Once a suite of insurers has been isolated, the fiduciary team can then concentrate on product selection.  While there is no safe harbor for the selection of product type, a thoroughly documented search should meet the DOL’s prudent man rule.  

For instance, IRIC has developed a number of checklists that allow plan fiduciaries to run through a decision-tree of sorts to determine what solution is most suitable for a particular plan.  These checklists help isolate: 

1. Whether an in-plan or out-of-plan annuity better meets the sponsors’ needs
2. If in-plan, whether auto or affirmative election is a better approach for this plan

Based on the outcomes of these and other questions, the plan sponsor and supporting consultant(s) can evaluate which existing annuity solutions are best to offer.  To complete this final step of income product selection in a prudent manner, it is important that plan fiduciaries have a full picture of what products and solutions are available.   IRIC maintains a current catalogue of annuity-based income solutions available to the defined contribution market, together with a list of features for easy comparison.  This can be found on IRIC’s website here.

In the end, plan sponsors and fiduciaries want to deliver the best possible outcomes in today’s defined contribution world. Guaranteeing lifetime income through the use of in-plan annuities should increasingly become part of their toolbox. 

Michelle Richter is the executive director of the Institutional Retirement Income Council, a non-profit, membership- based organization of retirement industry advisors.  Michelle is also principal and founder of Fiduciary Insurance Services LLC, New York, a consulting firm and registered investment adviser.

David Paul is principal of ALIRT Insurance Research, where he co-directs the company’s research staff, manages internal IT initiatives and product development, pens a number of the firm’s insurance industry research pieces, and oversees business development. He has worked as an insurance industry research analyst since 1993.