The Pension Benefit Guaranty Corporation (PBGC) issued its study of revenues needed to continue to protect participants in multiemployer plans that will likely run out of money.
The multiemployer program’s current assets are only a small fraction of the amount needed to cover guaranteed benefits for more than 1 million people in plans expected to run dry in the next decade. “Without changes, the multiemployer insurance program is likely to run out of money by 2025,” says PBGC Director Tom Reeder. “This report offers vital information for Congress as it considers how to stabilize the program and put it on sound financial footing.”
While the Kline-Miller Multiemployer Pension Reform Act of 2014 (MPRA) increased premiums paid by multiemployer pension plans to the PBGC, the program is still deeply underfunded. The report illustrates the effects of increasing premium revenues on the PBGC’s continued solvency under a variety of scenarios reflecting different assumptions as to how many plans would suspend benefits or apply for partition under MPRA. In each scenario, the likelihood that the multiemployer program will be insolvent before 2034 exceeds 50%, even if premium revenues are doubled.
“Much has changed in the last 10 years with product designs, industry standards and new technology all working together to help retirement plans and participants access structured lifetime income,” argues a new white paper from the Institutional Retirement Income Council (IRIC).
Despite the ongoing progress, there is still a stubborn perception in the retirement planning marketplace that “portability is an obstacle to offering lifetime income products due to both its importance and the widely held view that portability options do not exist or are not feasible,” IRIC explains.
The paper urges plan sponsors to consider a series of theoretical questions and answers, at the heart of what exactly is being ported for guaranteed lifetime incomes products and why portability is important to participants. These are basic and very important questions in understanding portability, IRIC says, but relatively few plan sponsors or participants have a good grounding in these issues, and so they miss out on the possibility of leveraging portability already available.
“After some trial and error, beginning around 2004, in-plan guaranteed lifetime income products have settled into a standard administrative form acceptable to many plan recordkeepers,” the paper observes. “This model is consistent with the capabilities and processes for recordkeeping daily valued and traded funds (e.g., mutual funds). This is codified in the SPARK income data file standards that are used by guaranteed lifetime income product providers today, as well as the recently published SPARK touchpoint guidelines.”
IRIC argues that these new SPARK guidelines, coupled with the extensive data technology developments of recent years, mean “we now operate in a more mature income product market where recordkeepers handle basic processing for guaranteed lifetime income products within existing processes like trading, enrollment, contributions, exchanges and display of account value.” Related to this, IRIC says recordkeepers are increasingly willing to put their data collection, aggregation and processing capabilities to work in delivering fully portable products.
“Portability is directly a function of how easily the guaranteed benefit value and data file sharing can be transferred across recordkeepers,” IRIC says. “The value of portability should be considered in the selection process of a guaranteed lifetime income product and the associated recordkeeper. … An investment provider or insurance company may initially offer [its] guaranteed product only on [its] proprietary platform. However, many insurance companies and many recordkeepers are willing to support portability and will build out the capabilities as demand for this grows in the marketplace.”
NEXT: Portability at the plan and participant level
IRIC predicts that, “with the number of plans offering
in-plan guaranteed lifetime income products now topping 33,500,” both
recordkeepers and insurance companies will be increasingly willing to build out the
capabilities needed to enable portability from one platform to another, or from one plan to another.
“The obvious reason for portability at a plan level is the business,
or fiduciary, decision to change recordkeepers,” IRIC says. “While the decision
to move is a substantial commitment of internal resources, moving to a new
service provider is driven by a host of reasons, including but not limited to
service-level issues; fees; plan consolidation due to corporate mergers, acquisitions
or divestitures; and outgrowing the current provider services and capabilities. …
For sponsors who want to add a guaranteed lifetime income option, portability
could be a factor in the decision to stay or to move to a new service provider.”
IRIC points to the “increased interest in retaining assets
in company-sponsored DC [defined contribution] plans instead of rolling over to an individual
retirement account (IRA) after termination or retirement” as another driver of portability
innovation in the near term.
“This trend will further promote consideration of providing guaranteed
lifetime income investment options to offer participants additional retirement
income alternatives,” IRIC predicts. “Defined contribution plans are no longer viewed
as just a retirement accumulation plan. Rather, DC plans are becoming decumulation
vehicles for plan participants. In addition, the vast majority of participants
in company-sponsored DC plans will pay lower fees than if they try to buy the
same guaranteed lifetime income product on their own.”
Getting
specific, IRIC urges plan sponsors to learn more
about guaranteed minimum withdrawal benefits (GMWBs); deferred income
annuities
(DIAs); and longevity insurance, including qualified longevity annuity
contracts
(QLACs). These are the approaches favored by investment providers in this
space today and through which firms have the most experience delivering
guaranteed income in the Employee Retirement Income Security Act (ERISA) context.