Administration April 30, 2020

Expect a Rise in Annuity Engagement

A different perspective post-COVID-19 will make guaranteed income more attractive to retirement plan sponsors and participants.
Reported by
Art by Wesley Allsbrook

Interest in guaranteed lifetime income options in defined contribution (DC) plans is growing after the latest market downturn caused by the COVID-19 pandemic.

Research from Allianz Life found 77% of workers currently enrolled in an employer-sponsored plan would consider adding an option that offers guaranteed lifetime income, and 59% said they would specifically consider adding an annuity feature. Sixty-one percent of respondents said they are looking for more information on how annuities can be part of their plan.

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Additionally, a recent Secure Retirement Institute (SRI) study found more than half of workers would be interested in a guaranteed lifetime income option if offered, and 61% said they would likely contribute.

Prior to passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which provided a fiduciary safe harbor for the selection of lifetime income products for retirement plan sponsors, the retirement industry only saw limited interest in in-plan annuities and has seen little implementation from plan sponsors, says Matt Gray, assistant vice president of worksite solutions at Allianz Life Insurance. “There’s still a lack of familiarity with the benefits of what an annuity can offer,” he adds. “Participants do seem to want guaranteed income, as well as more information, especially with these volatile times in the market.”

James Olson, a managing director at IPX, says he believes the industry will see an uptick in annuity engagement within the next 12 to 24 months. Prior to the market downturn, experts anticipated more communication surrounding the products, but only saw slight additions. “Due to COVID-19, there’s now just more interest among service providers, recordkeepers and participants,” he says. “Annuities can be a complicated product, but now it’s more of a component of a holistic retirement plan.”

Annuities have had a bad rap for some time now. Known as a bind between an individual and an insurance company, individuals will pay a lump sum of money for guaranteed payouts for life. Annuities are complex to digest, with several different types of annuities to understand, so discussing them with clients and participants can be a struggle for retirement industry professionals. Add in the fact that annuities have their own set of taxes and fees, and most individuals choose to rule them out from their options.

It wasn’t until the passage of the SECURE Act that the industry saw subtle interest among investors. And now, given the coronavirus crisis, the industry can expect to see even more talk about the options. “Prior to the SECURE Act, there wasn’t much interest or certainty. This has opened the door for consultants to understand the products and how they can turn the doors,” Gray notes.

Gray further adds that employers are educating themselves about annuities, given the rise in demand. “They’re starting to become more educated on analyzing these solutions for consideration in their plan, so that translates from them to their participants,” he continues. “It’s definitely a learning curve for all sources.”

More so than other generations, Millennial and Generation Z investors are expected to add guaranteed income options for their retirement savings. Because younger workers are less likely to have a pension or defined benefit (DB) option, a lifetime income opportunity could sound like an attractive feature, the SRI report finds.

In the study, nearly two-thirds of Millennials and Gen Zers said they are somewhat or very likely to contribute to a guaranteed income option, while 52% of Generation Xers and 42% of Baby Boomers felt the same. Since older workers have less time in the markets, there may not be much implementation coming from that group, Olson says.

Another motive for this growth among younger workforces is the fact that Millennials and Gen Zers will likely be risk-adverse investors, analysts find. These workers will search for products that provide a guaranteed income stream to avoid substantial losses, Olson says. “This workforce has seen market volatility so much more than other generations. These solutions resonate better with younger groups because of that,” he adds.

While retirement plan sponsors should expect to see an increase in participants searching for annuity options, they should also be prepared. While annuities are not new products, knowledge about their features is scarce for most investors, Gray explains. “It is a difficult topic, but there’s a lot of expertise within the industry to help bridge that knowledge gap,” he adds. “There’s a lot of experience, innovation and expertise in providing these.”

Olson says he believes service providers are responsible for designing simpler products—such as automatic features that include annuities—and providing participants with one-on-one education.

Compliance April 28, 2020

Multiemployer Plans Urgently Need Help to Avoid Catastrophe

Lawmakers and industry groups are pushing for immediate action as the COVID-19 pandemic wreaks havoc on already struggling multiemployer pensions.
Reported by
Art by A. Richard Allen

Many multiemployer plans were already on the brink of collapse before the market downturn caused by COVID-19 came in like a wrecking ball.

David Brenner, senior vice president and national director of Multiemployer Consulting at Segal in Boston says it’s too early to tell what effect the wide swings in the market will have on multiemployer plans in the long term. “We do know that those in critical and declining status will be challenged,” he says. “Even healthy plans will be challenged, but they should be able to recover.”

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Brenner explains that the industry could be devastated for the long term by widespread unemployment and resulting economic impacts.

A blog post on the Pension Rights Center’s website notes, “Multiemployer pension plans, which are run jointly by a union and two or more employers, cover 10 million workers and retirees. Most plans are financially stable but about 130 of them are spiraling toward insolvency, threatening the benefits of more than 1.4 million retirees—and that was before the stock market tumbled.”

In a letter to lawmakers urging multiemployer pension relief, cosigned by Brenner, Segal says it used publicly available information to model the potential impact of the COVID-19 crisis on the existing multiemployer pension solvency crisis. “Our analysis considered both investment losses and reductions in contribution income. Depending on the severity and duration of the COVID-19 crisis, we estimate that as many as 180 additional plans could face projected insolvency in the next 20 years. That would bring the total number of plans in critical and declining status to over 300, covering over 2.5 million workers, retirees and beneficiaries. In this scenario, the cost of providing financial assistance to enable all these plans to remain solvent would significantly exceed the pre-crisis range of $4.5 billion to $5 billion annually.”

Kyle Flaherty, partner at Bryan Cave Leighton Paisner in New York City, says he hasn’t seen much data yet on how the market downturn brought on by the COVID-19 pandemic has affected multiemployer plans, but “it occurs to me that the economic fallout is going to be devastating to a number of plans in the short term.” He explains that “each has its own funding rate assumption and with the market losses in the first quarter, it will be very difficult to meet that assumption in 2020.”

On a short-term basis, there will be an impact on virtually all plans, he says, while on a long-term basis, the downturn will be felt differently by different plans based on how quickly the market recovers. “It depends on the industry and whether the active participant base remains steady, or if drops in the active participant base are reversed, after the economic recovery,” he says.

Some plans are already struggling because there are more retired than active participants and they cover employers in industries that are already declining, Flaherty says. He explains that a small active participant base means there is a lower influx of contributions to offset market losses.

There has been no congressional relief yet, but Flaherty notes that some small employers may have received indirect help from the Paycheck Protection Program (PPP), which set aside $350 billion for small businesses as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. “It could temporarily provide resources to make contributions to multiemployer plans, but it’s not the type of relief employers can rely on going forward,” he says.

Previous Proposals

Attempts have been made over the past two years to address the multiemployer pension crisis. Flaherty notes that a bipartisan Joint Select Committee on the Solvency of Multiemployer Pension Plans was created in early 2018 and was tasked with coming up with a solution by November 30 of that year but failed to do so.

That committee heard testimony that suggested long-term loans would be a solution to shoring up struggling plans. Early last year, House Ways and Means Committee Chairman Richard Neal, D-Massachusetts, introduced the Rehabilitation for Multiemployer Pensions Act. The bill would establish a Pension Rehabilitation Administration (PRA)—an entirely new agency within the Department of the Treasury authorized to issue bonds to finance loans to “critical and declining” status multiemployer pension plans, plans that have suspended benefits and some recently insolvent plans currently receiving financial assistance from the Pension Benefit Guaranty Corporation (PBGC).

Democratic lawmakers started coalescing around two bills, including one previously put forward by Independent Vermont Senator Bernie Sanders and Representative Marcy Kaptur, D-Ohio, called the “Keep Our Pension Promises Act.” In short, the stand-alone bill would reverse a provision passed in 2014 that, as Democrats put it, “could result in deep pension cuts for millions of retirees and workers in multiemployer pension plans.” The other bill, the “Butch Lewis Act,” would establish a legacy fund within the PBGC “to ensure that multiemployer pension plans can continue to provide pension benefits to every eligible American for decades to come.” It would be paid for by closing “two tax loopholes that allow the wealthiest Americans to avoid paying their fair share of taxes.”

In November, Finance Committee Chairman Chuck Grassley, R-Iowa, and Senate HELP [Health, Education, Labor and Pensions] Committee Chairman Lamar Alexander, R-Tennessee, published a white paper outlining a proposed plan to address the multiemployer pension funding crisis. To help the “sickest plans” recover their financial footing, the proposal creates a special “partition” option. According to the senators, partitioning permits employers to maintain a financially healthy multiemployer plan by carving out pension benefit liabilities owed to participants who have been “orphaned” by employers that have exited the plan without paying their full share of those liabilities.

Both Brenner and Flaherty noted that there were discussions to include previous proposals for multiemployer pensions in the coronavirus relief bills, but efforts fell apart.

A New Push for Relief

U.S. Senator Patty Murray, D-Washington, ranking member of the Senate HELP Committee, released a statement about the need to address the multiemployer pension crisis in light of the COVID-19 pandemic: “Through no fault of their own, millions of workers and retirees are at risk of losing the pensions they have earned at the worst possible time. We can’t let that happen. This COVID-19 crisis is already making it harder for families and businesses to make ends meet—we need to do everything we can to ease the burden, and that includes solving the multiemployer pension crisis so workers and retirees aren’t thrown into even greater uncertainty. I’ve been pushing to negotiate a bipartisan solution that can solve this crisis once and for all, and I’m absolutely going to keep at it.”

In the short term, Brenner notes, multiemployer plans could use some funding relief, as was provided in previous recessions. He notes that the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) permitted multiemployer plans to use their prior year zone status certification in the current plan year and permitted plans in endangered or critical status to extend their recovery periods. The Pension Relief Act of 2010 (PRA) permitted eligible plans to recognize investment losses from 2008 and 2009 over a longer period of time.

In its letter to lawmakers, Segal says, “Barring a prolonged economic downturn, we expect that most multiemployer plans will be able to recover without federal financial assistance. These plans, however, will benefit from temporary relief from statutory funding requirements, allowing them more time to implement their recovery plans. The relief bills Congress passed following the financial market collapse of 2008 (WRERA ’08 and PRA ’10) provide an appropriate framework for the relief that will be needed following the COVID-19 crisis.”

Considering the longer term, Flaherty says, for him, the Butch Lewis Act strikes a balance between a total bailout and Republican proposals. “Something like the Butch Lewis Act has to be part of congressional relief because the fallout that will result if these plans fail will severely affect our country and our economy,” he says. “Something has to give for participants and families who rely on multiemployer pension benefits to have the safety net they were expecting.”

Brenner points out that there have been a number of letters sent to Congress to urge action, not only on addressing the multiemployer pension funding crisis but also on shoring up the PBGC. “There are solutions if there is a political will to do so. This is not an unsolvable problem,” he concludes.

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