Data and Research August 20, 2021

People Like ‘Guaranteed Income’ Over an ‘Annuity’

Not only does a name change increase the appeal of annuities, but framing them as insurance against running out of money in retirement does even more so.

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What’s in a name? A lot when it comes to annuities, according to a recent Morningstar study.

Stan Treger, a senior behavioral scientist at Morningstar, set out to discover whether the title of a product, as well as the thought of running out of money during retirement, influences people’s evaluation of annuities. In his study report, he notes that annuities have been touted by lawmakers, regulators and others in the retirement plan industry as the answer to the question of how defined contribution (DC) plan participants turn their savings into income in retirement. Treger also notes that annuities have not been popular, and some studies suggest this could be because of their complexity or because of people’s unwillingness to let go of control of a lump sum of amassed savings.

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The study included 1,067 U.S. residents who are older than 30 and employed. Per random assignment, study participants were asked questions about a product framed as either a “guaranteed stream of income for life” or as “an annuity.” Treger found that study participants were more willing to exchange a portion of their retirement savings when the product was called a guaranteed income stream than when it was called an annuity.

Overall, participants reported being concerned about the prospect of running out of money during retirement. Some study participants were asked about this concern before being asked about the willingness to exchange a portion of retirement savings for either a guaranteed income stream or an annuity. Treger found that those concerned about running out of money in retirement were more willing to exchange a portion of retirement savings for either one, regardless of what it was called.

The study also found that, in general, participants were willing to exchange approximately 30% of their savings in an employer-sponsored retirement account for a guaranteed income stream or annuity. But they were not very comfortable with allowing their employers to do this for them.

However, the more that study participants were willing to purchase the product, the more comfortable they were with their employer exchanging a portion of their retirement savings for it, and the larger chunk of their retirement savings they would be willing to exchange, the study report says. In addition, those comfortable with exchanging some of their retirement savings for the product were also more willing to delay their Social Security benefits to maximize their income.

Treger went even further and asked whether study participants preferred to pay a larger lump sum for immediate payments during retirement rather than a smaller lump sum for later payments during retirement. In general, study respondents preferred to pay a larger lump sum for the immediate annuity or guaranteed income stream. However, people who were asked questions about the fear of running out of money in retirement before being asked about the willingness to purchase the product were more likely to prefer the deferred annuity.

Treger concludes that his study shows that simply calling an annuity a name that describes its intended purpose—providing a guaranteed income stream that insures against running out of money in retirement—can make people more open to choosing one.

The full study report may be downloaded from here.

Compliance August 20, 2021

Lawsuit Says Baptist Health South Florida Didn’t Follow IPS

The claims are typical of excessive fee lawsuits, but the plaintiffs’ lawyers attempt to cover their bases by addressing issues that have caused claims in other suits to be dismissed.

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An Employee Retirement Income Security Act (ERISA) lawsuit has been filed against Baptist Health South Florida (BHSF), its board and its 403(b) retirement plan committee, alleging they breached their duty of prudence by not ensuring investment and recordkeeping fees were reasonable.

The claims are typical of excessive fee suits, including that plan fiduciaries failed to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; that they maintained certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; and that they failed to control the plan’s recordkeeping costs. However, unlike some recently filed complaints, the suit also cites language from the plan’s investment policy statement (IPS) and argues that the committee fell short in carrying out its responsibilities.

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According to the complaint, the IPS says the committee must evaluate fund performance and the appropriateness of the plan’s fees at least every quarter. The IPS also says the committee must, among other things, “evaluate each investment fund in terms of the performance compared to relevant market indices and peer groups” and must evaluate the “reasonableness of fees and costs associated with each investment fund.” The plaintiffs say the details of the complaint show the committee failed to do these things.

In the lawsuit, the plaintiffs’ lawyers attempt to cover issues that have caused claims in other lawsuits to be dismissed. In an attempt to show that the plaintiffs have exhausted their administrative remedies, the complaint says the plaintiffs sent an administrative demand to the plan administrator in February laying out claims identical to the ones in the lawsuit, which it says was ignored. The lawsuit also says the plan’s summary plan description (SPD) includes no specific provisions for submitting a complaint through the administrative process for the fiduciaries’ failure to prudently select and monitor the plan’s investment options.

In arguing that the case is not time-barred by ERISA’s statute of limitations, the complaint says, “The plaintiffs did not have knowledge of all material facts (including, among other things, the investment alternatives that are comparable to the investments offered within the plan, comparisons of the costs and investment performance of plan investments versus available alternatives within similarly sized plans, total cost comparisons to similarly sized plans, information regarding other available share classes) necessary to understand that the defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA until shortly before this suit was filed.”

It also says the plaintiffs did not have and do not have actual knowledge of the specifics of the defendants’ decisionmaking process with respect to the plan “because this information is solely within the possession of the defendants prior to discovery.” The plaintiffs say they make inferences based on factors brought up in the lawsuit.

Other courts have failed to find that participants have standing to sue over investments in which they did not invest. The complaint against BHSF notes that each of the plaintiffs at some point invested in the options that are subject to the lawsuit.

Some courts have refused to decide early in lawsuit proceedings whether passive and active funds are proper comparators in excessive fee lawsuits. However, in a lawsuit against Salesforce, a federal district court said, “Passively managed funds … ordinarily cannot serve as meaningful benchmarks for actively managed funds.” The BHSF lawsuit overcomes this issue by comparing funds in the plan with active funds which it says are similar and charge lower fees.

Among other things, the lawsuit seeks an order compelling the defendants to make good to the plan all losses resulting from the alleged breaches of their fiduciary duties.

BHSF did not respond to a request for comment about the suit.

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