ERISA Advisory Council Continues to Investigate Retirement Income in QDIAs

The ERISA Advisory Council continued to delve into the issue of retirement income solutions integrated into qualified default investment alternatives by hearing testimony from plan sponsors, lawyers and researchers in its meeting on Wednesday.

This was the council’s second meeting this week focusing on QDIAs and welfare plan claims and appeals.

In the first testimony, Jessica Sclafani, a senior defined contribution strategist at T. Rowe Price, shared results from T. Rowe Price’s 2024 defined contribution plan sponsor survey, as well as a five-dimensional framework the firm developed to help plan sponsors better understand retirement income needs and solutions.

Sourced from a survey of approximately 120 U.S.-based DC plan sponsors from last year’s fourth quarter, T. Rowe Price found that 71% of plan sponsors agreed with the statement that the demographics of their plan participants are older now than 10 years ago, and 69% said they want participants to keep their DC balances in the plan after they retire.

“This sentiment is strongest in the largest end of the market,” Sclafani said. “When you move down-market to smaller plans by assets, it’s still more of a world in which they would prefer to see retirees leave. But again, the largest plans … would prefer to see those retirees stay in [the plan].”

When it comes to in-plan guaranteed income solutions, Sclafani said they still are not commonly offered, and there is no obvious or consensus solution within the marketplace. She also noted that the industry lacks a “standard taxonomy” for discussing retirement income solutions, which she sees as a barrier to future implementation.

“I can talk about an investment that incorporates a partial guarantee, but I’m not always 100% sure that the person across the table from me is thinking about the same type of product,” Sclafani said. “Again, I think the industry as a whole would benefit from a consistent lexicon around retirement income solutions.”

QDIA’s ‘Key Difference’

Kevin Hanney, formerly the senior director of pension investments at RTX Corp., and Ken Levine, executive director of Global Retirement Strategy at RTX, both spoke about the in-plan guaranteed income solution that the aerospace and defense company, formerly Raytheon Technologies, implemented in 2012.

The RTX Lifetime Income Strategy has been the plan’s QDIA since 2012, functions like a target-date fund and embeds an annuity, providing a guaranteed stream of income in retirement. Like a TDF, the solution has an underlying mix of investments that becomes more conservative as the distance in years until one’s target retirement age diminishes.

However, Levine explained that there are key difference from a TDF in that when a participant reaches 50 years old—approximately 15 years from retirement—they have the option to start regularly allocating a portion of their money to a secure income portfolio, which will provide income for the rest of their life. This payout process happens automatically.

RTX works with AllianceBernstein to help adjust a participant’s portfolio over time, growing more conservative as they age.

“The shift into the Secure Income Portfolio is completed at age 62, and from that point forward, all new contributions go completely into the secure income portfolio,” Levine said. “Along with that, there is an explicit insurance fee that is clearly communicated. What that gives participant is guaranteed income for life … that can increase in periods of rising financial markets and will not decline in periods of falling financial markets.”

Levine said plan sponsors often cite an uncertain regulatory environment or a fear of being sued when explaining why they are not offering a guaranteed income solution as a QDIA.

“There’s a widespread misperception about these products and a general lack of knowledge and understanding them, and that’s really what’s prevented the widespread implementation of products like this,” Levine said. “It’s among the investment community, the consulting community, the plan sponsor and within the actuarial community. However, we witnessed this renewed interest among our peer companies … and we’ve seen many innovative products coming out market.”

EBSA Updates

Lisa Gomez, assistant secretary of Labor for the Employee Benefits Security Administration, and Timothy Hauser, deputy assistant secretary for program operations, also spoke at the ERISA Advisory Council meeting Wednesday morning and provided some updates on EBSA’s current projects.

Gomez first reminded council members that the DOL issued updated cybersecurity guidance last week for ERISA-covered employee retirement benefit plans and health and welfare plans. The DOL, along with the departments of Health and Human Services and the Treasury, also released a series of final rules to strengthen the Mental Health Parity and Addiction Equity Act earlier this week.

In addition, Gomez said EBSA is continuing to work on issuing some form of formal guidance on how to value employer stock in the context of employee stock ownership plans, which was required of the DOL and Treasury by the SECURE 2.0 Act of 2022. Other current projects include updating the Form 5500 system, revising the voluntary fiduciary correction program and drafting final regulations on automatic portability.

Gomez and Hauser also discussed EBSA’s budgetary concerns. If the agency is unable to receive supplemental funding from the federal government, Gomez said EBSA will have to reduce its staff by 120 full-time employees across its three regional offices.

“Gomez said. “We will definitely keep up with standards as much as we can, but we can’t possibly do everything with such reduced resources.”

A report from the Government Accountability Office last year revealed that EBSA increasingly relies on supplemental funding because its expenses have continued to increase while the base budget has been flat. EBSA did receive supplemental funding to implement the final rules on the MHPAEA.

Hauser said EBSA currently has a staff of about 850 people, which he said is already inadequate for an agency required to look out for the interests of 150 million people participating in retirement plans, health plans, disability plans and more.

“We have always worked hard [to] maximize the impact with too scarce resources, but this is really a whole other level of resource constraints, and it will be felt,” Hauser said. “There will be less compliance assistance, less enforcement, less guidance [and] less protection for workers and retirees and people needing health benefits.”