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…..