Most of us indeed want that! No wonder there is great interest in pursuing lifetime income options, often referred to as annuities, within retirement plans, like 401ks. Nonetheless, it’s easier said than done for plan participants to commit to lifetime options: there’s a desire for both secure lifetime income, and for hard saved dollars to continue producing through investment. How can plan sponsors best vet the choices–and remain ERISA compliant?
Participant Needs and Fiduciary Processes
There is no shortage of lifetime income options on the market for plan sponsors to select from when seeking to add this feature to a company sponsored retirement plan. The challenge for plan sponsors is identifying an option that truly addresses participant needs and interests. Given their fiduciary obligations, it’s also key for plan sponsors to ensure diligence in both making and documenting their decisions. At American Century Investments, Glenn Dial, Senior Retirement Strategist, suggests this three-step process for selecting an in-plan guaranteed income product:
- Identify the Insurer: Engage in an objective, thorough, and analytical process. The SECURE Act does not define required elements, such as a search.
- Consider Costs, Features, and Benefits: Consider “the cost (including fees and commissions) of the guaranteed retirement contract” in relation to the product features, benefits, and administrative services under the contract. The “relative” cost is reasonable….There is NO REQUIREMENT TO CHOOSE THE LOWEST COST PRODUCT.
- Consider Financial Capability of the Insurer: The Fiduciary obtains “written representations” from the insurer. Periodically review (annually) or if facts change.
According to Dial, surveys find that participants are seeking options that offer: “consistent payments, cost-of-living increases, low risk, downside protection, and up-market gains,” along with retaining control over assets: “they want the ability to change their mind at any time….” Of course, not all this is always possible, and ultimately, plan sponsors are essentially choosing between two primary categories of guaranteed income products:
- Guaranteed Withdrawal Benefit: Participant RETAINS Ownership of Asset. Under this scenario, the assets stay on the books of the 401 (k) plan even during the payout phase.
- Immediate Income Annuity: Participant SURRENDERS Assets. Under this scenario, the participant must send their assets to the insurance company (assets will not be in the plan anymore) in return for a promise to pay future payments (annuitize).
ERISA law experts remind plan sponsors that when making any and all decisions on behalf of the plan, it is necessary to keep fiduciary basics—like prudence and loyalty—front and center. Specifically, plan sponsors must “be sure they understand any option before selecting it” and clearly communicate the benefits and costs to participants:
Despite all the new products available to plans, “underneath it all, the same standards apply: prudence and loyalty,” says David Levine, a partner in the Groom Law Group, referencing the core fiduciary obligations under ERISA. The retirement world is constantly evolving, and “there are always new solutions as people try to address what people perceive as room for enhancement,” Levine says. Sponsors should evaluate the direct and indirect costs, the outcomes and the recordkeeping requirements of any option they are considering…..When it comes to fees associated with lifetime income products, sponsors should ask themselves, “in light of these fees, are the benefits to the plan and participant worth it?” There is no right or wrong answer, necessarily; a fiduciary just needs a prudent process for deciding and a “basis and rationale” for the final choice … .It is equally important to document this process to create evidence of ERISA compliance in the event decisions are questioned.
Given their inherent fiduciary responsibilities, plan sponsors must also continuously monitor plan performance, and that includes assessing the prudence of newly added options. While acting as diligently and prudently as possible on behalf of the plan and participants, sponsors need to remember they can be held personally liable in the event of a fiduciary breach. Moreover, although ERISA bonds are required by the DOL, they do not protect plan sponsors in the event allegations are made.
For the personal protection of retirement plan sponsors, Colonial Surety Company offers a convenient and affordable package. Armed with our Fiduciary Liability coverage, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber liability coverage is included at no extra cost, providing additional protection–for the plan and company–against regulatory actions related to data and privacy, as well as expert response services.
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