There are substantial efforts underway throughout the retirement market, attempting to wrap minds around the various aspects of providing lifetime income from DC plans. This includes efforts to design new programs and how to explain them to sponsors, fiduciaries and advisers who must make the ultimate selection election between competing choices. It occurred to me that an old poster may well describe this current “lifetime income state of affairs.”
This poster, by an artist named Chris Mac, had found a home on the interior ceiling of my 1970 AMC Gremlin, right past the globed dome light I had installed. (Ahhh, the 70’s or, as cartoonist Gary Trudeau labeled in his Doonesbury toast to the ’70’s: “an armpit pf a decade…..”).
The poster was fanciful in its day. Oddly enough, however, it now pretty well encapsulates what happens when you try to take one thing (a retirement savings plan) and turn it into quite another (a plan to guarantee a pension). Take another look at the picture, with all of its crazy moving pieces. Then think about just what it takes to to do what we are trying to do in the market: we are taking a combination of sometimes very different insurance products (for example, think FIA, RILA, VA, SPDA, CDA, group and individual, which is still the only way you can guarantee lifetime income), mixing them with other plan investment features, under an arrangement which is typically recordkept by someone other than the provider of the insurance or the other plan investments. Having spent a great deal of time over my (now very long) career developing these sorts of products, I can tell you that it all can work- but it is, as they say, all in the details.
Offering these programs through DC plans require the incorporation of unique elements of ERISA and the Tax Code, while addressing a wide panoply of state insurance law issues and some pretty serious securities laws issues. It also involves managing quite a collection of disclosure requirements, while attending to the structure and relationships related to Individual Retirement Annuities and Individual Retirement Accounts (yes, the rules between these two can differ) which may be necessary to make the benefits under these programs portable. Toss in, for healthy measure, a smattering of state trust and banking laws. Putting all of these pieces together in such a way that fiduciaries can be confident that the chosen program will, indeed, actually guarantee lifetime income is a challenge in itself.
Imbedding these products into a DC plan’s investment line-up also requires technology of a sort that really hasn’t been available until recently, and involves moving funds regularly between a plan’s liquid investments which are daily traded through the typical fund clearinghouses, and the not-yet-clearinghouse-connected insurance company accounts which provide the insurance guarantees. There was a time when we called this circumstance the handling of “outside assets.”
Then there is the additional prospect in the coming years that, should technology progress to this point, a variety of lifetime income options may be made available under a plan to accommodate plan participants’ own varying risk profiles.
In spite of this massive sort of infrastructure requirements that are needed to make DC lifetime become a reality, fiduciaries really don’t need to know the “ins and outs” of all of the details which are necessary to bind together and coordinate these programs. That is the task of some pretty serious techies. However, good counsel needs to be able to sort through the impacts of the elements of each of the designs being considered in order to arrive at a prudent assessment of how the guaranteed lifetime benefits will actually be provided to participants. This will not only involve getting familiar with a whole new vocabulary, but ultimately there needs to be at least a working knowledge of the different types of annuities which may be in play in any of these designs. This sort of mastery, if you will, may be necessary to be able to competently assist fiduciaries in discerning critical differences in these varying designs.
Putting these pieces together wrong can be disastrous. Properly done,, however, you may just end up with that rainbow….