Lifetime Income

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I cringed in horror as I listened to the Supreme Court debate on health care reform, and not for the reasons you may otherwise suspect. What concerned me greatly, and which is something which ultimately has an impact on the retirement industry, was the common reference by SCOTUS (Supreme Court of…

I have spent much of my career studying and practicing in the law of annuities as it applies to retirement plans-starting even prior to my long stint with an insurance holding company, when the Master Trust of the Fortune 100 company for which I was in-house ERISA counsel formulated its own synthetic, pooled GIC for…

Treasury nailed it (or, as our eldest son is fond of saying, they just "friggin’" nailed it).

With just a relatively short regulation and a Revenue Ruling, Treasury simply and in a very straightforward way laid out the definitive structure for defined contribution plans (like 401(k) plans) to start providing lifetime income in a market friendly manner. The two pieces of guidance dealing with DB plans which were issued at the same time are very useful, but the meat of the matter is the critical guidance given under the proposed RMD regulation and the spousal consent Revenue Ruling, 2012-3.
 
The seminal guidance doesn’t answer all the questions, but it does creates the structure, and a context, in which other questions-both from the tax and the ERISA side-can be meaningfully addressed.  Amazingly, it is also structured in such a manner to accommodate both straight life annuities and the living benefit products as well (like the GLWB).
 
I had criticized IRS and Treasury in the past for what I had viewed as the less than thoughtful way in which they were addressing (and not addressing) critical lifetime income issues. The new releases change all of that, and–the more I look at it-in a pretty startling way. I’m not sure I have ever seen so much stuffed into so little a regulatory space.
 
I particularly like the proposed QLAC (“qualified lifetime annuity contract”): its an everyman’s rule. It is nonforfeitable (many argued that it be otherwise), and it is simply designed for meaningful use by the rank and file. Other, more exotic, annuities with living benefits and the like (which are generally geared for the high net worth participant) still can be used for lifetime income as 2012-3 Contracts, but they just won’t get the beneficial QLAC treatment under the RMD rule. There’s really no sane policy reason to incent those products, as such would actually serve as a disincentive to guaranteed lifetime income. 
 
I’d like to share with you some of my initial thoughts on just what the proposed QLAC reg and Rev Rul 2012-3 did. Discussion and further study may shift some of these, but for now:
 
 
 

Continue Reading Treasury and IRS Successfully Lay the Base For Lifetime Income: The “2012-3 Annuity” and The QLAC

Section 939A of Dodd Frank has a very interesting mandate to federal agencies. It requires federal agencies to review their regulations to determine those which require the use of a credit-agency rating in assessing the credit-worthiness of a security and:

“Each such agency shall modify any such regulations identified by the review conducted under subsection…

In Robert Pirsig’s novel, Zen and The Art of Motorcycle Maintenance, the protagonist was a technical manual writer who went insane.  The author commented that the book had little relation to either Zen or motorcycle maintenance.  But at the core of the story was the minutiae which eventually drove him mad: to any explanation he could write in any of his manuals, he could always ask the question “why?”

Similarly, on the topic of annuity regulation in DC plans, minutiae is central to the theme. It is in dwelling there, though, is  where I believe that many of the solutions to the public policy challenges raised by this topic can be found. I just hope it doesn’t drive us mad as well…
 
It may seem to some a bit silly to compare annuity regulation to a classic, modern philosophical tome, but its really not. The answer to the questions at which the regulators will arrive will affect an awful lot of people and businesses for an awfully long time. (For my view on how  technical regs reflect important policy, I invite you to read one of my personal favorites-but least read-blogs, Erisa and Mom, which I try to publish every Mother’s Day). You see, what regulators are really doing are attempting to find the right balance between availability, flexibility and securing critical participant retirement rights. As automotive engineers have told me on more than one occasion (yes, I am Imported From Detroit-and have a T-shirt to prove it), every design decision is a trade-off. So for example, you can’t have the safest and most cost/fuel efficient car at the same time (imagine the Bradley fighting vehicle as the family minivan. Beside lousy fuel mileage and high operating costs, it would be hell on the road systems. But it sure would be safe in a collision).  
 
There are a few guiding principles I would think (with the fear of being far too presumptuous, as reg writing is a skill with which I have NO experience) might apply in delving into the minutiae for solutions. For example, it may be helpful  to follow Asimov’s Minimum Necessary Change concept. It could also be useful to keep in mind that not all annuity based guarantees are created equal (for example, does high water mark protection deserve the same policy treatment as guaranteed lifetime income?), nor are all annuity types suitable for retirement plans. At the same time, it is important to preserve the ability of the market to continue to develop innovative (and suitable) retirement products, and for plans to readily adopt them. Finally, if at all possible, keep it as simple as possible-as the DOL has recently been accomplishing with a measure of success. 
 
So, with all that, here are some thoughts what some annuity regulations could look like.

Continue Reading Zen and The Art of Annuity Regulation, Part 1

When the insurance industry began seriously developing the "living benefits" under annuity products for the retail marketplace a few years back, I dubbed them as "not your grandpa’s annuity." This is because they were attempting to address the concerns that the market had about traditional annuities, which are seen as irrevocable, inaccessible, invisible and inflexible.

But, first, another note of introduction……

It is with great pleasure to announce that my friend and fellow pink-shirted compatriot (many of our industry colleagues may fondly remember THAT story!) Sandy Koeppel has decided to join us as Of Counsel, and to have some fun following his illustrious career at Prudential.  Together with myself, Phil Troyer and Conni Toth, we intend to continue to contribute helping make the U.S. retirement system – which we are all so passionate about – work better. Sandy brings a tremendous wealth of experience in guaranteed lifetime income from employer plans to the marketplace (I invite you to read his bio), and intends to continue to carry this torch. Between us all, we offer substantial knowledge of the design, marketing and distribution of these products.

Sandy, as he mentions below, has also formed Plan Income Consulting & Evaluation Services, LLC (PLICES), a consulting firm which has affiliated with this firm and which provides advisors, vendors and employers consulting services related to guaranteed income products.  

Drop Sandy a note at sek@rtothlaw.com.

Now, his first blog:

The shift from Defined Benefit to Defined Contribution plans as the primary workplace retirement vehicle has eroded the confidence and jeopardized the retirement security of a vast number of American workers and their families. The recently published EBRI 2011 Retirement Confidence Survey finds that confidence among workers in their ability to have a comfortable retirement has dropped to an all-time low. According to the EBRI survey,

"the percentage of workers not at all confident about having enough money for a comfortable retirement grew from 22 percent in 2010 to 27 percent, the highest level measured in the 21 years of the RCS. At the same time, the percentage very confident shrank to the low of 13 percent." The RCS further states that "56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 37 percent report that they and/or their spouse currently have such a benefit with a current or previous employer. Therefore, up to 19 percent of workers may be expecting to receive the benefit from a future employer—a scenario that is becoming increasingly unlikely, since private-sector employers, in particular, have been cutting back on their defined benefit offerings."

These findings along with other results of this survey are disturbing and demonstrate that American workers not only are uninformed but feel challenged, concerned, and threatened about potential declines in their future lifestyle in retirement.

 With the passage of the Pension Protection Act, Congress recognized the need to instill defined benefit-like outcomes into the defined contribution plan universe. The PPA enables plan sponsors to include in their DC plans features such as automatic enrollment, automatic contribution escalation and gain fiduciary protection by offering qualified default investment alternatives deploying professional money management. These important first steps do much to replicate for workers the defined benefit plan experience in the asset accumulation stage. However, up to now, most DC plans do not offer the critical and essential missing piece to assure retirement security: guaranteed lifetime income. There are many reasons for this failure. Chief among them include: legal uncertainty about the rules and standards that apply to the choice of providers; unsettled tax issues (e.g. applicability of qualified joint and survivor annuity rules) associated with new and innovative forms of guaranteed lifetime income; cost and administrative burdens; lack of demand among participants; lack of guidance from the Department of Labor delineating between advice and education for distribution planning and the availability of out-of-plan (retail) vs in-plan (institutional) guaranteed lifetime income solutions if it is desired.    

Continue Reading For Guaranteed Lifetime Income in DC Plans: (ITS) Time Has Come Today