Business of Benefits

Business of Benefits

The Wharton Loan Default Study: Documenting Unemployment’s Unrecognized Penalties

Posted in General Comment

The Wharton School Pension Research Council’s new Working Paper on” Borrowing from the Future 401k Plan Loans and Loan Defaults”  finally validated what some of us knew to be true for quite awhile. Using actual participant and plan data from a very large database (not just a statistical sampling), the study found that 90% of 401(k) plans force a default on loans outstanding at the time a participant leaves employment and that, indeed, such loans actually do default at an extraordinary rate. This had never been apparent in the past because of the manner in which loan defaults are reported on the Form 5500, which then led to a great deal of cynicism by a number of commentators that this was a serious problem.

It is now clear. Defaulting loans at the time of unemployment is a significant source of retirement “leakage.”

Perhaps even more importantly is the human cost that the study’s numbers reveal. It shows that this traditional plan design imposes a severe financial hardship upon those who loan defaultinvoluntarily lose their jobs, at a time when they can least afford it. The taxation on the forced deemed distribution and 10% penalty on loan defaults is especially cruel. Not only may it artificially inflate the marginal tax rate and impose taxes without a distribution to pay them; but then the penalty is paid regardless of the application of the marginal rate or deductions. So, even if income was so small so that one would otherwise owe little or no tax, the 10% penalty is still applied.

No big deal, you may say? Well, think again. In January 2009, 779,000 jobs were lost; the total being 4.7 million that year. Given the level of 401(k) participation rates and given the loan rates referenced in the Wharton study, a large number of those unemployed would have been penalized while losing their retirement accounts. The heaviest impacted are low and middle-income workers, which also results in a goodly amount of tax revenue to the Treasury from their misfortune.

I wrote about this in my blog of December of 2011, about the Great Recession, that

“At a time when it was necessary to provide substantial assistance to large financial institutions in many-and now we find out, often hidden-ways, those who were unemployed continued to pay a 10% penalty tax on their defaulted loans and DC distributions which were taken to keep them afloat. In effect, the unemployed were funding, even if in the smallest part, the assistance to large financial orgs which received substantial government support (and, apparently, paid large bonuses from those funds to many of their still employed executives and traders). Regardless of political persuasion, most should have difficulty with this proposition.”

The problem persists even after the recession, as participants taking plan loans often aren’t even aware of their exposure.

Limiting the availability of loans is not the solution to this problem which some suggest. Reducing the liquidity of a plan only reduces plan participation by those who we are trying to encourage to save. The Wharton study shows, instead, that plan participants resist taking loans until they really need to do so. Taking away loans takes from the participant the ability to rebuild their retirement account after they need to tap into it. Compare this to taking a hardship distribution, which can never be rebuilt.

This is just not an employee concern, either. I have worked on a number of layoff efforts, where employers really do understand this type of human toll- but business exigencies force them to move forward anyway.

Given the lack of policy action dealing with these issues, what’s left are marketplace solutions. As is so often the case, innovative financial products (designed properly, with proper transparency) can provide some of the answers which support both the employee and the employer under such circumstances. Our practice focuses on this sort of innovation (think about the likes of DC lifetime Income, MEPS, aggregation models, affiliation arrangements, and other unique programs which we cannot yet discuss openly). So it is with the loan default problem. We are working at designing and implementing credible, affordable and non-disruptive loan protection programs in the same manner as we have always promoted marketplace solutions when Congress and the regulators aren’t providing the answers needed to make the system work just a little bit better.

The Wharton study confirms the depth of the problem and the importance of addressing it. Just being cynical doesn’t cut it. There’s meaningful work to be done.


Trouble Ahead for the Non-ERISA 403(b) Plan*

Posted in 403(b)

* Except,of course for governmental 403(b) plans and non electing churches……

It is difficult to maintain the non-ERISA status of a 403(b) arrangement. Those who wish to do so really have to work at it, with the irony being that “working at it” just may be what triggers ERISA status for those plans. In essence, one must “work at” “not working at it.” Don’t worry, this makes sense to those who engage in these efforts.

The ability to maintain the non-ERISA status of a 501(c)3 – 403(b) plan seems to have dimmed considerably late last year when the DOL took an interesting position in a lawsuit it filed last year against a 403(b) plan administrator.  The administrator regularly delayed depositing elective deferrals into a non-ERISA 403(b) plan for 3 or 4 months- a time period for which we would all agree is pretty egregious. What makes the case so striking (besides the fact that it is an enforcement effort by the DOL against a 403(b) plan, of which we have seen few) is that the DOL appears to condition the plan’s ERISA status on the “discretion” exercised by the plan administrator in failing to make timely deposits.

roughroadFor some background,  the non-ERISA status of a 403(b) plan is premised on employer “noninvolvement” in the plan. The challenge for these plans is that the IRS expanded employer responsibility for 403(b) arrangements in its 2007 regulations, making it tougher for an employer to exercise the authority needed to otherwise keep a 403(b) plan in tax compliance without also stepping over the line which would trigger ERISA status of a plan.  The DOL issued a “safe harbor” regulation in 1974, 2510.3-2(f), under which it granted 403(b) “elective deferral only” plans an exemption from ERISA as long as certain conditions were met. These conditions were based on the principal of non-employer involvement in the arrangement.  With the 2007 IRS regs causing more employer involvement, the DOL issued guidance in FABs 2007-2 and 2010-1 under which it further clarified how the safe harbor would now apply.

The DOL  generally takes a jaded view of claimed non-ERISA status for these plans, asserting that most any discretionary control over a plan’s assets or administration would nullify the exemption. So, for example, discrete acts such as authorizing plan-to-plan transfers; approving the processing of distributions; approving hardship distributions, QDROs, and eligibility for or enforcement of loans are all seen as discretionary acts which are “inconsistent” with the use of the safe harbor. An employer taking on any of these responsibilities will generally be triggering ERISA status for the plan.

The lawsuit seems to be adding a new twist to the determination of ERISA status. What the lawsuit looks to be asserting is that a non-ERISA plan which otherwise complies with the DOL “safe harbor” guidance may become an ERISA plan if the employer mishandles employee contributions. This is because an employer which does not deposit elective deferrals into the plan “within a period that is not longer than is reasonable for the proper administration of the plan” (as required by the tax regulations), or within the period required by the plan document, can be viewed as excercising discretion that triggers ERISA status.

There are substantial implications to this. It is the rare tax-exempt employer which always deposits, without fail, employee contributions in the 3-4 day window now being required by the DOL. Though I have little doubt that the occasional failure is unlikely to provide a sound basis for claiming that the employer is exercising discretion over plan assets, and trigger ERISA status, there is some tipping point at which this will occur. So, for example, a pattern of late deposits (even not of the 3-4 month variety described in the lawsuit) might do it.  Should the DOL continue with this approach, it may well incredibly limit the use of the ERISA “safe harbor” for a significant percentage of  plans.

We described the lawsuit (including its name and citation) in an article for our latest quarterly newsletter we wrote for our “403(b)/457(b) Technical Requirements Handbook.” The Handbook is really an unusual and useful tool. Its written and organized as a “how to” book, instead of the typical technical manual which merely defines terms. Its focus is on the practical application of the 403(b) and 457 rules; a guide designed to be used by those who want hands on guidance to compliance with both the tax and ERISA rules. Most unusual of all, it comes with a both a quarterly newsletter discussing timely compliance issues and a quarterly update to the manual itself, making sure your resource is current.

We encourage you to try a free 14-day trial of the Handbook. We think you’ll like it.



A Useful Compendium of Lifetime Income Guidance for Defined Contribution Plans

Posted in Fiduciary Issues, Lifetime Income
bookshelves sized

We have been extensively researching, writing on and developing the concept of providing lifetime income from defined contribution plans for some 15 years. The work has resulted in a patent; several major independantly published research papers; the  outlining of some of the important concepts which underline the proposed QLAC regs and its key revenue ruling; and the development of more than one retirement product. If you look closely, you’ll see that that many of the major whitepapers  published on lifetime income are well based on this extensive work we have published. Some of the work really is groundbreaking; for example, we propose  a useful fiduciary process which can be used by fiduciaries in the purchase of annuities, in our NYU paper.

This blog has carried much of that material for the past 5 years, since February, 2009. We’ve now compiled those pieces here for use by  employers, vendors, actuaries, advisers and attorneys who may be struggling to support lifetime income in defined contribution plans.

Continue Reading

Rome was not built in a day… build internal controls one step at a time

Posted in 403(b)

After many years of wading through a variety of retirement plan platforms and services, I can honestly say “I will never stop being fascinated”.  I do believe, with 100% certainty, that I will never be able to anticipate every possible compliance issue.    However, with as much certainty, I can say “processes, procedures and effective internal controls are vital to avoiding possible compliance gaps and hiccups and maintain a successful retirement plan.”

The IRS recognizes that gaps and hiccups will arise when comparing FORM, the plan document & design, to the plan’s operations, administrative processes and procedural activities.  The IRS provides guidance for plan sponsors to self-correct with the understanding that it isn’t as simple as just finding the gap or hiccup.  The IRS expects the plan sponsor to take three steps when gaps or hiccups arise… Continue Reading

“When All Else Fails, Read the Regulations….”

Posted in EPCRS

EPCRS, or some version of it, is now 23 years old. It really dates back to the first Audit Closing Agreement Program in 1990 and the Administrative Policy Regarding Sanctions (the “APRS”) in 1991. Prior to that time, as many of you will recall, plan disqualification was the sole sanction against which we needed to negotiate with the IRS-negotiations which were often wrapped up in negotiations of the plan sponsor’s own tax liability. I remember one classic deal where we received a pass on the plan penalty for acquiescing on a botched foreign tax credit.

This means that the IRS corrections rules are now based on long experience, and have quite a measure of sophistication and nuance (built of experience) baked into them. It has been continually updated, and the IRS regularly seeks to refresh the program and keep it relevant based upon taxpayer and practitioner input. In short, it’s an IRS program that works (warts and all).

It really shows up in the practical application of the rules. Consider EPCRS’ “Under Examination” rules. If a plan is “Under Examination” it generally cannot take advantage of the more favorable VCP; and SCP is limited- meaning the plan sponsor would need to rely upon the more expensive Audit Cap to fix the problems.

Applying the “Under Examination rules really are interesting, and demonstrates the nuance. For example:

-If the plan sponsor of a 401(a) plan has been notified of an IRS audit of its business tax return (such as the Form 1120), this NOT “Under Examination” for purposes of using VCP or SCP. “Under Examination” is an audit of the Form 5500, not the other business related tax returns of the plan sponsor. It is, however, a heads up that you should probably move fast and fix problems if you want to take advantage of the more favorable VCP and SCP. The agent may open a Form 5500 review as part of the business audit.

-If the plan sponsor of a 403(b) plan is notified of a Form 990 audit (effectively, the information return for a 501(c)(3) org), that IS “Under Examination” for purposes of EPCRS, and VCP cannot be initiated for plan problems at that time. It appears that the source of the rule is that a large number of 403(b) plans are not required to file Form 5500′s, and this is meant to accommodate that issue.

-Notice of a DOL audit, or even an actual DOL audit, does NOT constitute “Under Examination” for EPCRS purposes. As a matter of fact, receiving a DOL notice and then proceeding to use EPCRS to fix a plan problem may be to the employer’s advantage when dealing with the DOL (as you have found a problem and fixed it) if that problem may also constitute a potential fiduciary breach.

A V.P. of Tax for a large company once advised me as a young lawyer many years ago, that “when all else fails, read the regulations.” Even now, when I think I know the answer off the top of my head, or when trying to cobble together a solution, a quick look at the close detail and the nuance of a reg is helpful. EPCRS is no exception…..


Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.

A Regulatory and Fiduciary Framework for Providing Lifetime Income from Defined Contribution Plans

Posted in Lifetime Income, Lifetime Income Published Papers

In July 2008, Bob Kistler, Nick Curabba and I put together what may have been the first published effort at compiling the fundamental rules which govern the distribution of lifetime income from defined contribution plans.

Quite a bit has happened since then. There’s been two new GAO studies on lifetime income; a joint DOL and Treasury Request for Information Regarding Lifetime Income Options (the “RFI”) and the related hearings; the issuance by the IRS of two contradictory revenue rulings on key lifetime income issues, and a clarification on those issues by a subsequent Revenue Ruling; a Revenue Ruling on DC transfers to purchase benefits under a DB plan; two new sets of proposed IRS regulations, including the Qualified Lifetime Annuity Contract regs; The ERISA Advisory Council issued a report on the “spend-down” of retirement assets; and the DOL’s Advanced Proposed Rule Making on lifetime income disclosure.

A number of new lifetime income products have been introduced into the market by both insurers and mutual fund companies to build upon all of this interest.

On the liability side, NOLHGA (the National Organization of Life and Health Insurance Guaranty Associations) issued a report on the “Life and Health Insurance Guaranty System, and the Financial Crisis of 2008–2009″ which helps explain how state guaranty associations cone into play in protecting lifetime income; and there have been several key court decisions addressing fiduciary status under group annuity contracts.

A more complete and up to date description of how lifetime income can work in a DC plan is in order. Evan Giller (newly Of Counsel with Boutwell and Faye) and I put together the attached piece entitled “Regulatory and Fiduciary Framework for Providing Lifetime Income from Defined Contribution Plans.“ It is originally appearing in the New York University Review of Employee Benefits and Executive Compensation – 2013, published by LexisNexis Matthew Bender, Copyright 2013 New York University. In the paper, we’ve drawn upon our long experience with retirement plan annuities, mixing it well with all of these new developments.

One of the paper’s key features is that it lays out a framework by which fiduciaries may be able to make fiduciary determinations on products and insurers without requiring further guidance from the DOL; relying instead on traditional concepts.

We found that each of the sections in this paper could have easily been significantly expanded, now that we have a broader experience in the workings of this idea.

Please let us know what you think!

The “Balancing Problem” in Reporting “403(b) Policy Loans” on the Form 5500 Schedule H

Posted in 403(b)

If you are wringing your hands trying to figure out how you report those 403(b) “policy loans” on the Form 5500 Schedule H, understand that you are not alone-and that there is no easy answer to your dilemma. This problem arises from a continuing flaw in the Form 5500, which the DOL never fixed after requiring 403(b) plans to fully report financials for plan years 2009.

A “policy loan” is an instrument unique in the retirement market to the 403(b) plans. With just a few exceptions, it is the manner in which loans are made by vendors under 403(b) annuity contracts. They are fundamentally based on policy loans from insurance contracts issued in the non-retiremnt market.

Here’s the source of the problem: Typically, for the “plan loan” (of the sort under a 401(k) plan and the 403(b) plan with Custodial Accounts (ether group or individual)) the funds for a loan are actually removed from the participant’s account, and investments are liquidated. What is left in the plan is an account receivable backed by the promissory note, and there are no investments in the plan to report. This matches up well with Line 1(c)8, which requires that the outstanding value of the be included as part of the plan’s financial statement as an asset.

But the 403(b) annuity “policy loan” is much different. The cash from the loan is obtained from the insurer’s general account, and no investment funds are ever liquidated from the participant’s annuity contract. An amount equal to the value of the outstanding value of the loan are transferred to a “restricted” investment held within one of the annuity contract’s investment funds, or in a separate account specially designed to pay a special rate of interest on that investment. The participant has no access to those funds, and the funds are released over time as the loan (with interest) is repaid to the insurer.

The asset statement from the insurer then shows that there is an investment still in the contract, as an asset equal to the value of the outstanding loan. It is earning interest which is reportable on the 5500, and is reportable as an asset of the plan as part of the value of Line 1(c)10 or 1(c)14 of Schedule H. If you then also report the outstanding value of the loan on Line 1(c)8, as you seemingly are required to do, you have double counted the value of the asset, and have an unbalanced financial statement.

Auditors hate this, and they try to address it in a number of creative ways. The problem is that it can’t be ignored: the loan balances, and in particular the defaulted loans, still need to be reported. I find it useful to be reported on the auditor’s report, either as a footnote or separate paragraph. But don’t ignore the issue.

This is not so much a problem for Schedule I filers, for small plans, because the participant loans are reportable on line 3 just as a description of assets in the plan, where it does not need to balance back to Line 2.



Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.

About Reporting Those Late Deposits to 403(b) Plans…….

Posted in 403(b)

With October 15 closing in and large numbers of Form 5500s being finalized also comes the wrapping up of all the loose ends necessary for audits to be completed.

There is some disturbing stuff in that potpourri of issues crossing our desks. Most striking is that even now, some six years after the publication of IRS and DOL guidance related to the "new world" of 403(b) regulations, there continues to be a basic misunderstanding of some of the fundamental remaining differences between 403(b) and 401(k) plans-even from otherwise reputable auditing firms.

One set of those involves the reporting rules related to the correction and reporting on the 5500 of one of the most common errors in any elective deferral plan, the late deposit of those deferrals into the plan. We were asked to by an IQPA to provide evidence that the Form 5330 was filed on a 403(b) plan with late deferrals, and that a VFCP has been filed. 

As you may imagine, I actually took some pleasure in answering this question. But the answer could serve as a reminder for many:

  • Though late deferrals to an ERISA 403(b) plan do need to be reported under the Compliance portion of  the Form 5500 Schedule H or Schedule I, Form 5330 cannot be filed-in spite of the silence in the Form 5500 instructions. This is because the Tax Code’s prohibited transaction rules, Section 4975, do not apply to 403(b) plans-even if it is an ERISA 403(b) plan. Form 5330 is only for plans to which 4975 applies.  Tell your auditor NOT to file the Form 5330, and that no 5330 penalty tax is due.
  • Late ERISA 403(b) deposits are, however, violations of ERISA’s prohibited transaction rules under ERISA Section 406.  This means that the DOL’s Voluntary Fiduciary Compliance Program (VFCP)  does apply to these deposits. But your analysis shouldn’t stop there. Note that, unlike the mandatory rule under Code Section 4975, the ERISA 5% penalty on the earnings on these late deposits under ERISA 502(i) is an administrative penalty that may be assessed by the DOL.  The statute only requires that you fix the late deposit (by paying the interest), not that you report it other than on the Form 5500 or pay a penalty. In small cases- lets say, for example, where the maximum penalty imposed is little more than a few dollars-it is well worth considering not filing under VFCP.  An auditor will have a hard time dinging a plan for a sawbuck or two.
  • And about those "late" deposits.  Some insurance companies are notorious about the time in which they take to actually allocate their 403(b) deposits to individual contracts. I’ve seen one vendor claim that it has seven days to do it. The problem this causes on audit is that many auditors pick up the posting date of the contribution to the participant’s contract, and claim that the late posting represents a late deposit, and a prohibited transaction.  This is not the rule. The DOL has recognized this issue of there being time between the deposit and the date it is allocated. It provided and an important example in its preamble to its “deposit” rules under 2510.30-102 that

    “Where, for example, an employer mails a check to the plan, the Department is of the view that the employer has segregated participant contributions from plan assets on the day the check is mailed to the plan, provided that the check clears the bank.”

Remind your auditor that the test is the date that the money is irrevocably sent from the employer’s account (such as by check or wire), NOT the date the vendor allocates the deposit to the contract.

Just as my frustration with Independent Qualified Public Accountants was peaking, our oldest son, Ryan (who is in the business, working for the Newport Group in North Carolina) dropped us a note reminding us that when you Google the term IQPA, the lead result is the "International Quarter Pony Association."  Levity does help put things into perspective…..  



Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   






Complications for 403(b) Plan Fiduciaries Under the TIAA Class Action: The Striking Impact of LaRue and the Cy Pres Notice

Posted in 403(b)

A  little noticed class action law suit first filed against TIAA-CREF in 2009 is finally coming home to roost for many fiduciaries of 403(b) plans-without many affected plans even having a clue that they have become members of that class action. The case is Bauer-Ramazani, et al. v. Teachers Insurance and Annuity Association of America-College Retirement and Equities Fund (TIAA-CREF), et al., Case No. 1:09-CV-190, pending in federal court in Brattleboro, Vermont.

The lawsuit challenges the manner in which TIAA manages what is commonly known as the "gain-loss" processes related to the untimely fulfillment  of participant investment instructions in the "separate account" under TIAA’s ERISA  variable annuity contracts. 

This is a critical issue in the operation of these 403(b) plans.  It is also the sort of claim one might expect to be brought by fiduciaries of the affected 403(b) plans, (the ones with the legal responsibility for managing these plans) and that the named members of the class would be other affected plans. But neither is the case here. In a legal absurdity, the "named plaintiffs," (that is, those who brought the suit and who are legally charged with representing the interests of the affected plans in the class) are not the affected plans or plan fiduciaries, but two plan participants in a small 403(b) plan in Vermont.  And the court documents seem to be geared instead  to individual participants in the affected plans, not the fiduciaries of those plans.

This was all made possible by the US Supreme Court landmark decision in LaRue, which established that participants could maintain certain fiduciary lawsuits as long as they were representing the plan as a whole, and not as a claim for their own benefits.

Now the United States District Court in Vermont has approved that class, which means the class action is now  proceeding to litigation on the merits of the claims. The definition of the class includes "all persons, including all ‘persons’ as defined by 29 U.S.C. § 1002(9), who at any time during the Class Period requested a transfer or distribution of TIAA-CREF mutual fund or money market accounts covered by ERISA whose accounts were not transferred or distributed within seven days of the date the account was valued and were denied the investment gains.”

Because of the operation of ERISA, "persons" in this context also means "plans," as a participant’s rights under a plan are derivative of the plan’s rights. So every 403(b) ERISA Plan which holds a TIAA contract during the class period (which is August 17, 2003 to May 9, 20013) is a member of the class.

This is where it really does get complicated. In spite of LaRue, fiduciaries of these plans likely still have an obligation to monitor this lawsuit, which includes making those decisions related to the plan’s involvement in the lawsuit: the representation of their interests in the lawsuit; the management of the lawsuit;  the adequacy of the class representatives; and any settlement which may be achieved.  There will be inevitable problems here, should the participants of a plan in the class disagree with their plan’s fiduciaries on the conduct of the litigation, or on settlement offers.

This is serious stuff. So, you would think,  that all of TIAA’s plans would receive notice of this important lawsuit, or that at least the notices were to be geared for them. For example, the right to opt out of the lawsuit has just passed on August 15, and you would think that fiduciaries would need to know that information.

Well, think again. Though the Federal Rules of Civil Procedure require members of a class  to be given the "best notice that is practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort," (the "cy pres" notice) it does not appear that the form of notice approved by the court accommodated notice to the affected plans. Many plans and their related fiduciaries are yet unaware  of this lawsuit. The cynic would say that the counsel for neither the Plaintiffs or Defense viewed it in their interests to raise with the Court the thought that plans and fiduciaries would be class members, and to design notices which would reach those class members.  So the Court approved a form of notice which did not include a method by which plans could be readily notified, being seemingly designed instead to reach  individual participants.

This is important, with the period for opting out of the class-a fiduciary choice-passing.  Fiduciaries will now be bound by whatever is found by the Court and, if a number of the arguments presented by either party to date is any indicator, getting a sound decision by the Court may be mere serendipity.



Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.   




Aggregation Models, Plan Loan Insurance, Lifetime Income Patents: Addressing Retirement Security by “Looking Through the Wrong End of a Telescope”

Posted in Fiduciary Issues, Lifetime Income, Multiple Employer Plans

Many of you know, or know of, Shlomo Benartzi, the Behavioral Economist from UCLA who studies retirement behavior. I had the pleasure of testifying with him in the DOL/Treasury Lifetime Income hearings.

Professor Benartzi wrote an intriguing article in P&I, discussing the need for innovation in the retirement marketplace, and advocating the establishment of an incubator to identify and test promising new ideas which promote retirement security. In particular, Shlomo noted the growing acknowledgement of the problem of leakage from defined contribution plans.

In an almost stealth–like way, innovation is creeping into the marketplace and creating ways to address critical retirement issues, even without an incubator. Though these programs can do little to address what I view as the basic retirement inadequacy issue-that is, employers are generally moving away from the traditional notion of building adequate retirement programs into their employment models-they are making progress toward making the best of what we’ve got.

Examples of some of these programs with which our firm has been actively involved are worth discussing. We take the Ted Giesel (a/k/a Dr. Suess) approach to these sorts of things. Giesel was fond of saying that he had the habit of, “looking through the wrong end of a telescope,” and that has made all the difference. For us, it is in looking at the close details of the rules with a fresh eye which is making all of the difference.

It’s worth noting that these efforts all depend heavily (and in surprisingly detailed ways) on technology. None of these programs would have been possible without the technological advancements over the past decade:

Aggregation Models. This is the “after-effect” of the DOL advisory opinion on Multiple Employer Plans. Working with vendors like TAG and Transamerica, we are implementing an effective way to achieve scale in fiduciary and investment services which effectively mimics the benefits of a MEP without their risks. This, in turn, provides employers with opportunities they may not otherwise have in plan design and investments, particularly with the growing complication of the fiduciary rules.


DC PLan Loan insurance. Some of my good friends, and people I hold in very high regard, do publicly chastise (dare I say “pooh-pooh”? Its got to be in a Dr. Sues book somewhere!) the notion of DC plan loan insurance. But it is an interesting and valuable innovation which (when properly designed, priced and disclosed) protects plan participants from plan-related losses due to circumstances beyond their control. It also provides one marketplace solution to the DC leakage problem Prof. Benartzi addresses in his article. Custodia’s (the company whose product with which we are involved) current model is based on existing rules, and there is proposed legislation to make it more easily fit within plans. This is one of those innovations that should be given a chance to stand or fall in the marketplace.


DC Lifetime Annuity Patents. The US Patent and Trademark Office has issued 3 patents in the past 3 months related to providing lifetime income from defined contributions plans (LFG’s, US 8,429,052 B2; Pru’s US 8,438,046 B2; and Genworth’s US 8,433,634 B1). I am the “inventor” on one of them, LFG’s, which provides a way to seamlessly annuitize from a NAV platform. The three patents all take a different approach to lifetime income, which actually makes a couple of important points. First, on the impact and value of good regulation. The proposed QLAC regulation on annuities and Rev Rul 2012-3 both laid the base to permit these patents to work. Without those pronouncements, these three programs really could not be effectively implemented. Secondly, don’t fear these process patents. They show that there are a large number of ways to skin this cat, and that those investing in their own “skinning” methods should be able to protect them.

This is really just the tip of the iceberg; there are a number of other things stirring as well. By “looking through the wrong end of the telescope,” I think you’ll find that the current rules can support a great deal of innovation which can promote retirement security. We just have to look…..