In February of 2009, I wrote the following, an excerpt from one of this blogsite’s first articles:
“DC annuitization seems to be picking up a head of steam recently, with attention being paid to guaranteed income streams because of the effects of the recession on 401(k) and 403(b) accounts….So, the real question is now what? Most consultants, TPAs and lawyers have only a passing familiarity with annuities, particularly the new breed of annuities which offer innovative guarantees. How does one go about deciding which annuity is right, whether the fees are appropriate, and whether the insurance company is solvent enough? How do you explain their features to plan participants, and what part does it play in an employer’s benefit program? What do you need to know about state guarantee associations, and what about rating agencies and the problems they now seem to be having?
In short, the things a plan has to look at to buy these financial guarantees creates quite a “fog” for an industry unaccustomed to them. The products are not difficult to understand, but their features, documentation and issues are much different than the typical plan investment we have been dealing with over the past few decades.”
There have been a significant number of developments since then, not the least of which being the SECURE Act providing three key new provisions to support lifetime income from DC plans (with the new annuity provider safe harbor, the new lifetime income disclosure rules, and the new lifetime income “portability”); invigorated efforts by all sorts of financial service companies to provide a variety of different lifetime income programs; and, finally, a growing sense by plan sponsors and participants that lifetime income guarantees are important (see, for example this recent TIAA survey).
Even for all of this excitement, elements of that “annuity fog” I wrote about 13 years ago seem to continue to linger. I suspect it still has to do with the market’s continuing basic lack of understanding and how guarantees work in a defined contribution retirement plan. Take a look at the detailed workflow I had put together in 2007, which we had included in a 2013 lifetime income patent (#8,429,052 B2, of which I am actually the “co-inventor” with Dan Herr). This illustrates the notion that there is a lot of “backroom engineering” required to make these programs work at the participant level. This is because of the fact that a contract with a licensed insurance carrier is still the only way any company can actually “guarantee” lifetime payments to a plan or its participants, even if you are using a CIT or an IRA custodian to provide the payment of the benefit. What this then means is that there has to be a lot of technical coordination between the computer and recordkeeping platforms of a number of different service companies, including single plan trusts, CITs, IRA custodians, insurers and anyone else in the “chain” of providing these benefits.
It’s not that the all of those pieces that are being put together are all that complicated, but its that they way the are put together is unfamiliar to most. Those advising plans will need to become familiar with how all they work together (including their client/plans role in it all) and-inevitably- the new jargon with which we will all need to become familiar.