Retirement plan service providers are revving up their product development engines now that the Treasury and Labor departments are paving the way for annuities to be paired with target date funds in 401(k) plans.
Plan service providers have long awaited guidance from regulators on whether plan sponsors can use these products as qualified default investment alternatives. For instance, BlackRock's LifePath Retirement Income — which paired target date funds with deferred income annuities from MetLife Inc. — was launched about seven years ago. But lack of regulatory clarity on whether plan sponsors could use such products, along with other concerns, kept it and other products from taking off, noted Chip Castille, head of BlackRock's U.S. Retirement Group.
“Fortunately, at least with this kind of product, those issues are something we can now address,” he said. “We have guidance on how it can work in a QDIA. We can have a more constructive conversation today.”
Last Friday, the U.S. Department of the Treasury and the IRS
issued new rules on using deferred annuities to provide lifetime income via target date funds.
“We've been working on it intensely for the last month or two months,” said Bob Reynolds, president and chief executive of Great-West Financial and Putnam Investments. The company took a closer look at deferred annuities after the Treasury and IRS
issued initial guidance in July to make it easier for plan participants to buy deferred income annuities that begin payout as late as age 85.
Meanwhile, last Thursday, Phyllis C. Borzi, assistant secretary at the Department of Labor,
wrote a letter to J. Mark Iwry, senior adviser to the Treasury secretary, clarifying that target date funds' investment in unallocated deferred annuity contracts as fixed income investments would permit those funds to meet the requirements necessary to make them qualified default investment alternatives in a retirement plan.
Per Treasury's memo, in order for safe harbor to apply to the plan sponsor, he or she must choose the investment manager and the target date fund. Acting as a fiduciary, the investment manager must then choose the insurer providing the annuity. Both the investment manager and the insurer must be independent from each other.
Lincoln National Corp. is already working to address the issue of keeping investment managers separate from itself as an insurer. The insurer offers guaranteed withdrawal benefits — which aren't addressed in the Treasury's latest memo — in connection with target date funds.
Third-party advisers and consultants who act as fiduciary investment managers can craft their own fund line-up elsewhere or work with a fiduciary like Ibbotson Associates, and use guaranteed features offered by Lincoln, according to Bob Melia, vice president of product development at Lincoln's retirement plan services unit.
Though the Treasury, IRS and DOL's latest guidance makes it easier for plans to incorporate annuities as a part of their plan line-up, experts note that there is room for further clarification from additional guidance.
For one thing, the fact that the investment manager is responsible for selecting the insurer takes a weight off the shoulders of employers.
“That addresses a concern that plan sponsors have had for a long time: 'What is our liability for choosing the provider if they don't meet the payments down the road?'” said Bradford P. Campbell, counsel at Drinker Biddle Reath LLP and former assistant secretary of labor.
But other questions remain. Mr. Campbell noted that the DOL's guidance outlining the safe harbor as it applies to annuity selection seems subjective. For instance, those who choose the provider must “appropriately consider” the cost of the contract and the information sufficient to assess whether the provider can make payments.
“It's hard to know whether you comply with the safe harbor and [whether] you are protected by it,” Mr. Campbell said.
There's also the issue of what the pricing will look like, noted Marcia Wagner, managing director at the Wagner Law Group. “Will there be significantly different pricing depending on the age and age groups?” she asked. “What if people want to distribute their savings earlier than expected? Will there be a price adjustment?”
Finally, the guidance provided last week only applies to deferred income annuities, in which buyers pay premiums in the present in order to receive income many years into the future. Guaranteed minimum withdrawal benefits and guaranteed lifetime withdrawal benefits are excluded from the guidance at the moment.
Though guaranteed withdrawal benefits weren’t covered in this latest note, Fred Reish, partner at Drinker Biddle, predicted something on those products will be forthcoming from Treasury.
“I have a feeling that they’re working on guidance for GMWBs,” he said. Guaranteed withdrawal benefits act as an insurance wrapper around the underlying investment, while Treasury’s note addressed annuities within target date funds. “That presents some factually different issues,” Mr. Reish said.
