Sponsors Can Benefit From Their Own Analysis of Portability

“Much has changed in the last 10 years with product designs, industry standards and new technology all working together to help retirement plans and participants access structured lifetime income,” argues a new white paper from the Institutional Retirement Income Council (IRIC).

Despite the ongoing progress, there is still a stubborn perception in the retirement planning marketplace that “portability is an obstacle to offering lifetime income products due to both its importance and the widely held view that portability options do not exist or are not feasible,” IRIC explains.

The paper urges plan sponsors to consider a series of theoretical questions and answers, at the heart of what exactly is being ported for guaranteed lifetime incomes products and why portability is important to participants. These are basic and very important questions in understanding portability, IRIC says, but relatively few plan sponsors or participants have a good grounding in these issues, and so they miss out on the possibility of leveraging portability already available.   

“After some trial and error, beginning around 2004, in-plan guaranteed lifetime income products have settled into a standard administrative form acceptable to many plan recordkeepers,” the paper observes. “This model is consistent with the capabilities and processes for recordkeeping daily valued and traded funds (e.g., mutual funds). This is codified in the SPARK income data file standards that are used by guaranteed lifetime income product providers today, as well as the recently published SPARK touchpoint guidelines.”

IRIC argues that these new SPARK guidelines, coupled with the extensive data technology developments of recent years, mean “we now operate in a more mature income product market where recordkeepers handle basic processing for guaranteed lifetime income products within existing processes like trading, enrollment, contributions, exchanges and display of account value.” Related to this, IRIC says recordkeepers are increasingly willing to put their data collection, aggregation and processing capabilities to work in delivering fully portable products. 

“Portability is directly a function of how easily the guaranteed benefit value and data file sharing can be transferred across recordkeepers,” IRIC says. “The value of portability should be considered in the selection process of a guaranteed lifetime income product and the associated recordkeeper. … An investment provider or insurance company may initially offer [its] guaranteed product only on [its] proprietary platform. However, many insurance companies and many recordkeepers are willing to support portability and will build out the capabilities as demand for this grows in the marketplace.”

NEXT: Portability at the plan and participant level 

IRIC predicts that, “with the number of plans offering in-plan guaranteed lifetime income products now topping 33,500,” both recordkeepers and insurance companies will be increasingly willing to build out the capabilities needed to enable portability from one platform to another, or from one plan to another. 

“The obvious reason for portability at a plan level is the business, or fiduciary, decision to change recordkeepers,” IRIC says. “While the decision to move is a substantial commitment of internal resources, moving to a new service provider is driven by a host of reasons, including but not limited to service-level issues; fees; plan consolidation due to corporate mergers, acquisitions or divestitures; and outgrowing the current provider services and capabilities. … For sponsors who want to add a guaranteed lifetime income option, portability could be a factor in the decision to stay or to move to a new service provider.”

IRIC points to the “increased interest in retaining assets in company-sponsored DC [defined contribution] plans instead of rolling over to an individual retirement account (IRA) after termination or retirement” as another driver of portability innovation in the near term.

“This trend will further promote consideration of providing guaranteed lifetime income investment options to offer participants additional retirement income alternatives,” IRIC predicts. “Defined contribution plans are no longer viewed as just a retirement accumulation plan. Rather, DC plans are becoming decumulation vehicles for plan participants. In addition, the vast majority of participants in company-sponsored DC plans will pay lower fees than if they try to buy the same guaranteed lifetime income product on their own.”

Getting specific, IRIC urges plan sponsors to learn more about guaranteed minimum withdrawal benefits (GMWBs); deferred income annuities (DIAs); and longevity insurance, including qualified longevity annuity contracts (QLACs). These are the approaches favored by investment providers in this space today and through which firms have the most experience delivering guaranteed income in the Employee Retirement Income Security Act (ERISA) context.

The full portability Q-and-A is presented here.