During a Brookings Institution event focused on the topic of retirement income, J. Mark Iwry, nonresident senior fellow – Economic Studies at the Brookings Institution, and former senior adviser to the secretary and deputy assistant secretary for retirement and health policy at the U.S. Department of Treasury, pointed out that many defined contribution (DC) plan sponsors are reluctant to offer retirement income solutions, such as annuities, in their plans due to a concern about fiduciary liability if the insurer—or annuity provider—becomes insolvent.

He and Phyllis C. Borzi, former assistant secretary for the Employee Benefit Security Administration (EBSA) at the U.S. Department of Labor (DOL), agree that a safe harbor is needed in order to move forward on lifetime income options in DC plans.

Iwry said a safe harbor could use a financial strength criterion about how sound an annuity carrier is in terms contract and costs. Although he says it could help to use information from major ratings agencies and, say, require at least two good ratings for the insurance carrier, he notes that ratings agencies have gotten a “black eye” for ratings of certain investments in the past.

Borzi said in prior safe harbor regulations, the EBSA thought about bootstrapping onto credit ratings, but it was a violation of Dodd Frank, which took reliance on credit ratings off the table. “It was because of the distrust of ratings agencies at the time,” she said. “Ideally, Congress would change Dodd-Frank and put credit ratings back on the table.”

Borzi believes a standard for establishing the financial solvency of insurers is the way to go with a safe harbor, but also the point is to narrow down due diligence decisions for plan sponsors. “I think in terms of a safe harbor, it should be narrowed down to the types of products the sole purpose of which is to provide guaranteed income. A problem in the insurance marketplace is insurers have a proliferation of products with different objectives. Failings with one type of product does not mean failings with other products insurers offer.”

Iwry pointed out that the Employee Retirement Income Security Act (ERISA) expects plan sponsors to pay for their own independent assessment of whether insurers can pay claims and have financial strength. And, he said, recent legislative proposals, such as the Retirement Enhancement and Savings Act (RESA), do not include financial strength criterion, just regulatory approval. “We would include financial ratings, but we are in favor of having legislation passed,” he said. “If the legislation cannot be changed, maybe regulations following passage of the legislation can shore up the safe harbor.”

Borzi says a safe harbor is not as simple as checking off five or so points. “A poorly designed safe harbor does more harm to the plan sponsor. It should be designed in way to not only protect the plan sponsor, but participants,” she said. “That is my greatest disappointed in current legislative proposals. I wouldn’t call it a safe harbor, I would just call it a ratification that the insurer isn’t a bottom dweller. Plan sponsors can select any carrier as long as it is not under investigation.”

She added, “Plan sponsors I know have not spent a lifetime to help participants have good, solid retirement income in order to throw it all away on a substandard product. The safe harbor needs to focus on financial solvency and strength of the insurer.”

Borzi talked about what some in her circle call the “mother rule”—if the alternative to selecting this annuity is having your mother live with you, would you select this product? “The safe harbor in proposed legislation fails this mother rule,” she said.

Iwry noted that another issue plan sponsors have with including annuities in their DC plans is the portability issue—participants can’t get the annuity out of the plan if they leave their employer. He suggested amending regulations to allow lifetime income products to be rolled over to an individual retirement account (IRA), provided it’s not abused to include only participants in senior positions.

A model in place

Kelli Hueler, CEO of Hueler Income Solutions, which offers outside-of-plan annuity solutions to DC retirement plan sponsors and participants, said, “We are not going to get much further without an annuity selection safe harbor.” She added there are a high number of rollovers to the insurance providers with predatory practices because employers are not offering lifetime income options.

Hueler’s firm has practiced standards since 1997 that definitely include looking at the investment grade of insurance companies, with a focus on ongoing efforts to make sure insurers are doing things to remain solvent. The firm looks at:

• Conflict free, no pay-to-play;
• Institutional pricing with level fees;
• Fee disclosure;
• Independent insurer selection criteria and ongoing monitoring;
• Standardized quote, fees and features;
• Meaningful competition;
• IRA rollovers;
• Retiree selects annuity form and income features; and
• Objective guidance and purchase guidelines.

“Getting employers to feel comfortable offering guaranteed lifetime income in the features of retirement plans is the future of the market,” Hueler said. “We believe our system is actuarially very fair, and we value having an independent fiduciary and serve as that model.”