Benefits July 31, 2014

A Fiduciary Roadmap for Picking Lifetime Income Options

July 31, 2014 (PLANSPONSOR.com) – An analysis published recently in the Benefits Law Journal guides plan sponsors through the process of building a fiduciary framework for selecting lifetime income options.
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The analysis, “Guaranteed Lifetime Withdrawal Benefits: Fiduciary Considerations for Plan Sponsors,” was developed by Robert Eccles, Gregory Jacob and Wayne Jacobsen, all of the law firm O’Melveny and Myers LLP. It outlines an approach that can be used to fulfill plan fiduciary obligations to act in a prudent manner, the attorneys say.

IRIC, a nonprofit think tank supporting the retirement income planning community, helped to underwrite the research effort from Eccles, Jacob and Jacobsen—three lawyers specializing in the Employee Retirement Income Security Act (ERISA).

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“Despite workers’ growing desire for guaranteed retirement income, especially in light of the continuing shift from traditional pension plans to defined contribution plans, many employers have been reluctant to include retirement income options such as guaranteed lifetime withdrawal benefits products (GLWBs) in their retirement plans,” says William Charyk, president of IRIC, based in Iselin, New Jersey.

He adds, “The employers’ hesitation lies primarily with their misconceptions concerning perceived fiduciary responsibility and liability issues with these options. The attorneys, however, offer a new approach that we believe will help plan sponsors get through the many challenges of offering a retirement income option.”

The authors of the analysis demonstrate that fiduciary standards applicable to offering a GLWB option in an employer-sponsored retirement plan are “no different than the standards applied to fiduciaries relative to the selections of any other investment or retirement income option.” They also emphasize that the decision to include the category of a retirement income option in a retirement plan investment menu should be made at the settlor level, rather than the fiduciary level.

The analysis offers what Charyk terms as a “new fiduciary roadmap” to supplement existing guidance that fiduciaries can use when choosing an appropriate GLWB option. This includes how to:

  • Account for portability concerns;
  • Evaluate GLWB fees;
  • Identify an appropriate GLWB provider;
  • Evaluate a provider’s ability to make future payments;
  • Periodically monitor providers; and
  • Educate plan participants.

Charyk believes that this approach will ultimately lead more employers to start looking at retirement income solutions and to feel substantially more comfortable with their ability to satisfy the relevant legal and fiduciary duties. He adds, “The authors’ roadmap of existing regulatory guidance, used in conjunction with other available guidance, will provide plan fiduciaries with confidence to construct a prudent process, consistent with their legal obligations, for evaluating, selecting, and administering GLWBs.”

A copy of the analysis, which appeared in the summer 2014 issue of the Benefits Law Journal and was financed in part by IRIC, can be found here.

Benefits July 31, 2014

DC Accounts Continue to Rebound from Credit Crisis

July 31, 2014 (PLANSPONSOR.com) – The average account balance of consistent participants in 401(k) plans saw a 6.8% annualized increase between year-end 2007 and year-end 2012, says a new study.
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The increase reflects both employer and worker contributions, according to joint research from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), as well as investment returns, withdrawals and loans. As the study points out, this relatively strong yearly growth comes despite a 34.7% drop in the average 401(k) account balance experienced during the depths of the most recent financial crisis, circa 2008.

The study, called “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007–2012,” also discovered that the average account balance of “consistent participants” was 67% higher than the average account balance among all participants in the EBRI/ICI 401(k) database. Sarah Holden, ICI’s senior director of retirement and investor research and coauthor of the study, says this result suggests that contributing to a 401(k) plan consistently is likely to result in higher account balances—even during periods of substantial market volatility.

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This study also revealed that slightly more consistent 401(k) participants—i.e., those with an account during each year in the sample period—held target-date funds (TDFs) at year-end 2012 than did so at year-end 2007. According to Jack VanDerhei, EBRI research director and coauthor of the study, almost one-third of those holding target-date assets invested all of their 401(k) balances in TDFs.

“The data confirms the continuing important role of target-date funds in 401(k) plans, revealing that a substantial core of consistent 401(k) participants who held at least some target-date fund assets in their account before the financial crisis, still did so at year-end 2012,” he explains.

When analyzing the group of consistent 401(k) participants at year-end 2012, the data showed that 4.5% had added a TDF allocation since 2007. At year-end 2007, 27.6% of 401(k) participants in the consistent sample owned target-date funds. By year-end 2012, ownership in the consistent sample had increased to 32.1%. More than two in five (43.7%) consistent 401(k) participants in their 20s had target-date funds in their 401(k) accounts at year-end 2012, compared with 28.4% of consistent 401(k) participants in their 60s.

Looking at the wider sample, ownership of TDFs in 2012 had increased considerably to reach 41%, an increase of 15.9 percentage points since 2007. Because TDFs are often used as a default investment option in 401(k) plans with automatic enrollment, some of their growth is related to the spread of automatic enrollment in recent years, the study says. 

On average, around three-fifths of 401(k) participants’ assets were invested in equities, either through equity funds, the equity portion of target-date funds, the equity portion of non-target date balanced funds, or company stock. Younger 401(k) participants tend to have higher concentrations in equities than older 401(k) participants, according to the study.

Trends in the consistent group’s account balances highlight the accumulation effect of ongoing 401(k) participation, the study shows. At year-end 2012, 15.5% of the consistent group had more than $200,000 in their 401(k) accounts at their current employers, while another 16.2% had between $100,000 and $200,000. In contrast, in the broader EBRI/ICI 401(k) database, just 8.5% of participants had accounts with more than $200,000, and 9.5% had between $100,000 and $200,000.

A full copy of the study is available here.

— Matthew Miselis and John Manganaro

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