Compliance June 9, 2022

PSNC 2022: Legislation and Regulations Regarding Retirement Income

What do ERISA, the SECURE Act and government regulations say about retirement plan sponsors’ duties in offering retirement income strategies to participants?

Reported by

Jodi Epstein, a partner in Ivins, Phillips & Barker, spoke to attendees at the 2022 PLANSPONSOR National Conference, in Orlando, with optimism that legislators on Capitol Hill have great interest in developing policies that enable defined contribution plans to offer retirement income.

“Defined benefit plans are going away,” Epstein said, “and DC retirement plans are attempting to put in place what DB plans had, by creating an income stream in retirement. The contributions that participants—and their employers—make to their accounts still need to be distributed. And, with millions of Baby Boomers retiring, the annuity push is in the DC space.”

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

There are several ways to take retirement income Epstein noted. Taking a lump-sum distribution historically does not work well. “You hope the participant will move the funds into an IRA, but often they don’t do that, and the lump sum is spent in just a few years,” she observed.

From an Employee Retirement Income Security Act point of view, arranging for retirement income requires both the fiduciary role and then the design, or settlor, role. The design question is whether the plan sponsor wants to take on a distribution option. The implementation is a fiduciary role where the sponsor must be conscious of fees, interactions and the quality of the experience for the participants.

“What the DOL [Department of Labor] and the IRS are trying to do is to give the plan sponsor more room so they don’t have to babysit this situation,” Epstein said.

Certain legislation has been instituted. With hopes that participants will become more cognizant of their need for lifetime income, Congress, in 2019, enacted the Setting Every Community Up for Retirement Enhancement—aka SECURE—Act, a provision of which mandated that lifetime income illustrations appear at least once a year in participant statements, starting by this September 18. The DOL has devised assumptions that DC plans may use to estimate the monthly income that workers’ retirement plan balance will likely generate over their lifetime.

In July 2014, IRS regulations allowed DC plan participants to purchase a deferred income annuity if their plan offered one. These annuities are limited to 25% of a participant’s account balance, or $125,000, whichever is less, across all participant funding sources and can pay out for a single life or joint lives. But the deferred income annuity does not count for required minimum distribution purposes. The House-passed version of “SECURE 2.0”—viz., the Security a Strong Retirement Act of 2022—would eliminate the 25% limit.

In-plan annuities can give participants lifetime income during their retirement, but employers “are concerned about being sued for breach of fiduciary duties if the annuity provider they select faces problems years from now and about what their responsibilities would be for ongoing monitoring and oversight of that provider,” she said. A provision in the SECURE Act made it easier to offer lifetime income in a DC plan, relieving plan sponsors of the burden of responsibility for the annuity provider “until the end.”

The legislation protects employers from liability if they select an annuity provider that, along with meeting other requirements, has been licensed for the preceding seven years by the state insurance commissioner to offer guaranteed retirement income contracts. The SECURE Act also increased the portability of annuity investments by letting employees who take another job or retire move their annuity to another DC plan or to an IRA without surrender charges and fees.

Plans may rely on written representation from insurers about their status under state insurance laws. The DOL provided a safe harbor in Field Assistance Bulletin 2015-02.

Portability rules mean a participant may take a distribution of a lifetime income investment if the plan no longer offers that investment. Participants may roll it into an IRA or another retirement plan. If it’s an annuity contract, it may be distributed to the participant.

There’s a lot of work ahead for Congress to make this easier for plan sponsors. According to Epstein, “This is the next retirement trend for early adopters. It’s coming, but it’s complicated.

“Currently, there are no legal stumbling blocks; there is enough of a pathway. But plan sponsors don’t understand annuities; they find them to be expensive, and they’re worried that they’ll add annuities to their plan design and participants won’t use [them].”

Investing June 9, 2022

PSNC 2022: ESG Definitions and New Developments

What is environmental, social and governance investing? And exactly how new—or not—is it?

Reported by

During the ESG Essentials pre-conference seminar at the PLANSPONSOR National Conference in Orlando, Bonnie Saynay, the managing director of ISS ESG, provided a detailed history of the use of environmental, social and governance factors by institutional investors and their fund managers.

Saynay started by acknowledging that ESG is currently enjoying a moment in the institutional investor spotlight. Regulators in Washington, D.C., and in states across the union, are taking a close look at the development and distribution of ESG-focused investment products and services. Meanwhile, a significant portion of the U.S. investor population, across institutional and retail markets, say they want access to ESG-focused investment products and services.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

However, the truth is that ESG investing, as a general matter, has roots going back more than a century. Saynay noted that, in 1898, the Friends Fiduciary Corporation launched a socially responsible investing fund that sought to meet the needs of Quaker investors concerned about firearms and alcohol. Later, in 1920, the Methodist Church in the United Kingdom started a program to help its members avoid certain types of “sinful” investments, and some 50 years later, the Pax World Fund was established with the goal of opposing militarism. When one looks back, Saynay said, the history is rich.

“So, suffice to say, the ESG issue has been evolving for a long time,” Saynay said. “One thing that is new, at least here in the United States, is the growing conviction that ESG investing is, in a sense, simply good investing. ESG investing is not about taking a values-based position. It is, in reality, the effort to take a full view of externalities and risks and how important factors could impact your returns.”

Of course, some ESG strategies involve negative screening that simply rejects certain stocks or entire sectors, potentially denting performance potential, but that’s not what ESG is all about in 2022, Saynay said. Instead, modern ESG investing is about leveraging the vast, rapidly growing pool of data and insights that pertain to factors directly impacting the performance of investment portfolios. Saynay listed off factors such as a company’s carbon footprint; its ability to manage waste; its impact on air quality and biodiversity; its water use; its impact on land degradation; its ability to attract and retain diverse talent; its ability to ensure good governance; its cybersecurity capabilities; and its transparency in corporate executive pay.

“As a point of reference, some 90% of S&P 500 companies are already disclosing ESG information in their recurring statements, and ESG issues are now a constant topic in earnings calls,” Saynay said.

When it comes to the retirement plan fiduciary’s perspective, Saynay said, some degree of caution when utilizing ESG is warranted, because the regulatory picture is complex and there are strict requirements for fiduciaries under the Employee Retirement Income Security Act. However, it is simply no longer the case that ESG is a fringe issue. Simply put, ESG factors are currently material to the performance of investment portfolios, and in that sense, plan fiduciaries may in fact have a duty to weigh the possibility of securing better performance by leveraging ESG considerations.

“Research also shows that about three-quarters of retirement plan participants surveyed say they would increase contributions if they could access ESG within their workplace savings plan,” Saynay said. “In addition, there is strong evidence that suggests retirement plan participants also have a greater, stronger connection with their workplace when the companies they work for speak about ESG issues and offer the opportunity to invest accordingly.”

Saynay said the ESG market of today is rapidly evolving, and there is particularly strong interest in the idea of “ESG integration.” As Saynay explained it, this approach sees asset managers utilize ESG data and frameworks to improve portfolio outcomes—rather than to achieve a particular social and environmental impact. Many asset managers are thus already directly coding ESG-focused information into the valuation models they utilize.

Speaking to the challenges associated with ESG implementation, Saynay pointed principally to the fluid and fast-expanding availability of potentially useful and economically material data.

“The opportunity set to use this data continues to grow at a rapid clip,” she explained. “One challenge stemming from this fact is that there is not any single governing body to help investors understand the information they are receiving or to help securities issuers know how they should be structuring and distributing such data.”

Saynay named as another challenge the difficulty of understanding how to work with third parties, such as assurance providers, which offer professional advice to companies on how to publicly disclose data and how to live up to the ESG promises they may have made to their clients.  

“From the asset manager perspective, if your trading system is supposed to be flagging something and it does not actually flag that development, that’s a problem,” Saynay said. “When it comes to ESG investing, due diligence and monitoring is so critical. You can’t just rely on fund names or representations without actually looking under the hood.”

«