“Individual Annuities”-that is, annuity contracts which each cover a single person and their beneficiaries-are uncommon in 401(a) plans (403(b) plans are quite another story, to be discussed in a later writing).”Group annuities” -where a single annuity contract covers a group of participants-are, on the other hand, quite commonplace in retirement plans (yes, even 403(b) plans). The reason for this may well be both historical and technological: in a plan that, let’s say, covers 1000 employees, it has  in the past been a bit klutzy  to enter into (and administer) each one of those individual annuity contracts for each participant. Yet there are a number of elements of an individual annuity which makes them uniquely suited to address some of the more vexing logistical issues that arise in the implementation of a DC Lifetime Income program.

Enter technology, without which I don’t believe providing any sort of robust DC Lifetime Income program can really be possible. Each of the innovative programs we are seeing enter into the Lifetime Income market are heavily reliant on technology, often provided by what is commonly referred to as “middleware,” a term with which fiduciaries will become well aware. This middleware does a number of things, the most important of which is serving effectively as the “translator” between the sophisticated products providing lifetime income and the plan’s own participant records. That middleware is often used as the technological solution for the use of individual annuities where they haven’t been able to be used before.

There is an important cautionary note, however, in the use of individual annuities in plans. What has happened over time is that a large number of  insurance companies have developed two different sets of internal compliance and administrative processes, one which which applies to individual annuities (as they have been sold on a retail basis to individual consumers) and another, separate set of them which applies to group annuities (which have been largely sold to retirement plans).

Take group annuities. They can vary widely in design, from merely being a plan level investment of the plan, all the way  to the insurer establishing formal legal relationships with the participant through the issuance of a “certificate.”   There exists a very sophisticated industry established around the provisions of the group annuity in the retirement plan space, which is focused on ERISA’s fiduciary rules and matters of plan level compliance. Regardless of the particulars of any group annuity design, the one thing these contracts have in common is that they are designed to comply with the whole panoply of rules which apply when a retirement plan  purchases an insurance contract. There is, for example, an extensive set of ERISA rules which govern the use of annuities in retirement plans, from the ubiquitous PT exemption 84-24, to the Form 5500’s Schedule A, and many other requirements in between. The FINRA rules which apply to the sale  of annuities to plans are also different than those which apply to the sale of annuities to individuals, and the various anti-money laundering and OFAC rules apply in much different ways as well. Even the state laws governing the filing and approval of these contracts can be different. Insurers, though, are well skilled at these retirement plan practices.

Then there is, on the other hand, also a  very sophisticated industry established around the provisions of the individual annuity in the consumer driven  retirement income space, which is focused on ways to enhance and protect an individual’s financial well being-but outside of retirement plans. There are impressive mathematical models which continue to be developed (see, for example Wade Pfau’s and Alex Murguia’s new RISA being amongst the most prominent of them)which are designed to enable the design and implementation of personalized retirement income planning strategies aligned with individual preferences.  All of these kinds of services rely heavily upon the appropriate use of different types of guarantees provided by insurance companies, and matching them up with an individual’s own risk profile and preference. Like group annuities, individual annuities also have their own wide range of compliance requirements, which apply in different ways than to the sale of annuity products to retirement plans.  Insurers are also well skilled at these rules governing the individual annuities.

For the valuable, well established,  elements of the individual annuity retirement income space to successfully “crossover” into the DC Lifetime Income market, the group annuity “infrastructure” needs to be exported to the individual product side of things. This is where the “engineering” comes in, as aligning these products with new infrastructure is not necessarily a simple task.

Simply put, this means that most of the commonly available individual annuities sold to consumers are not suitable for the purchase by most 401(a) plans as part of their DC Lifetime Income program without changes being made to the design, administration and compensation (it is also worthwhile to note that the pricing and disclosure rules related to individual and retirement plan products can be vastly different). The differences can range from the types of disclosures being made, to the handling of money in and money out, to the manner in which it is all reported on required annual statements, along with a basketful of other sorts of requirements.

A number of insurers have made the investment necessary to accomplish this feat. It does, however, become a key fiduciary inquiry as to whether or not the annuity being purchased has been designed for use by retirement plans.  Recognize also that different products of the same insurer might be supported by different systems and processes, and the fiduciary will need to make sure it is getting to the right one.


Actuaries and mathematicians will tell us that the “actuarial cost” of any annuity you may purchase is effectively the same, no matter what sort of annuity you purchase. After all,  your life expectancy is what it is; the interest rates are what they are; and the insurance companies investments supporting the lifetime guarantees are what they are. The thinking then goes that all DC lifetime income decumulation guarantees have essentially the same value.

In reality, however, insurance companies “slice and dice” different annuity guarantees for retirement plans  in a variety of different ways, and there can be a bit of diversity  in the design and pricing of those guarantees.  For example, the promise of an enhanced future benefit which may provide increases in the payout over time (providing a measure of inflation protection) may  pay an initial monthly payout amount which may be less than what a comparable premium could purchase as a straight  life annuity; or the nature of certain so-called “high water mark” guarantees can differ vastly from product to product, and be balanced by the presence-or absence-of other features. Each insurer builds in these sorts of “favored” features into their products, and each of these choices may differ from insurer to insurer, and product to product.

Even more globally, an insurer may choose (yes,  insurers have some degree of  choice in such matters) to maintain the highest A.M. Best rating of “A++”, while  another may choose instead to maintain an “A” rating.  The higher rating can actually be more expensive to maintain because of certain financial requirements for those ratings, like the level of reserves, which also can be reflected in the cost of the annuity. As another example, some insurance companies are simply better than others at hedging investments because of the time and expense they may have put in (or not put in) developing and maintaining those particular skill sets. This can impact the design of equity-related guarantees which any insurer can offer (like the popular GLWB (“guaranteed lifetime withdrawal benefit”)).

Regardless of these choices,  common among all of the potential  guarantee variants is the simple fact that the longer an insurer holds your money (and with more certainty), the better the guarantee the insurer will typically be able provide to the plan -as guaranteeing risk is, one could say, a risky proposition. That risk becomes more manageable with longer tenured assets. This is one reason why the typical QLAC is relatively inexpensive: the QLAC payout is determinable at the date of purchase; it is set to begin payout at a specified date (perhaps as far out as age 85); there is extremely limited ability to surrender the contract once it is purchased; and there is very little ability for the benefit to grow.

This means that a plan purchasing longevity guarantees is typically accompanied with a number of restrictions which are needed by the insurer to manage the risks it has undertaken.   Given that DC investments have been focused almost solely on the simple asset accumulation models, the typical defined contribution plan fiduciary (or, much less, the participant) has little familiarity with this side of the decumulation of assets. It is, however, conceptually similar  to those old fixed account programs which placed restrictions on a participant’s ability to transfer to computing funds (or other similar restrictions) in return for their being credited with a higher rate of return; or with the typical design  of a “fixed index annuity,” where the insurer limits the ability of the participant to change indices through the year in order to guarantee a “floor” on the plan’s investment in the contract.

So it is with longevity guarantees: there will be what are effectively “time based” restrictions necessary for the insurer to manage its risks in providing those long-term guarantees. A classic example can be found in the design of the typical GLWB. Under the GLWB, the plan participant has the ability to invest their account balance in such a way that it can accumulate an “enhanced decumulation” benefit over time. How this is done is that such programs provide the plan participant with both an “account value” (often referred to as the accumulation value) and a value called the “benefit base.” The accumulation value is the dollar amount which is carried on the participant statement as part of the participants accrued benefit under the plan, and which reflects the cash value of the participant’s assets in the program.  This “benefit base,” on the other hand, is a calculated number which actually has no cash value. However,  it IS the number upon which the participant’s guaranteed monthly payout will be calculated at the time of retirement (instead of the account value). Each insurer calculates this “benefit base” differently, but it is effectively designed to “grow faster” (sometimes substantially so) than the actual account value. It reflects the larger lifetime guarantee that the insurer will be able to provide to the participant even after the participant’s accumulation value is exhausted through GLWB-permitted withdrawals (withdrawing amounts in excess of those permitted under the GLWB contract will reduce the monthly payment-but only before actual “annuitization”-but more on that in another blog). All or a portion of this accumulated “benefit base” can  be lost, however, to the extent the participant liquidates all or a portion of their plan account which is holding the guarantee.  Such a participant who then wants lifetime income  at retirement will then need to use their plan account value to purchase an annuity, sans the enhanced guarantees.

There are a few key takeaways. First, “accumulating decumulation” rights is very much different than merely accumulating investment assets under a plan. In order to benefit from the value of these enhancements, participants and fiduciaries must be comfortable with accepting some restrictions on accessing plan funds. This is so very opposite to the mutual fund, daily trading world to which participants have become accustomed. Secondly,  any such “decumulation accumulations” have  built in restrictions which are necessary for the insurer to be able to provide those guarantees. Thirdly, the specifics of these restrictions are  not universal from program to program, and should be reviewed and understood. Finally,  this blog only discusses the accumulation of guarantees over time within a plan. There is a whole host of valuable guarantees which can also be purchased at the time of retirement as well.

Properly investing a portion of a plan account in a Lifetime Income program really does  demand some appreciation-and acceptance- of time and the nature of insurance products.  A reset of the familiar mindset, if you will.


It sometimes helps to go back to the basics when assessing the impact of changes to the law, including some of the most seemingly obscure of them. One of the most obscure of 403(b) rules lies in the structural difference between 403(b) and 401(a) plans.  This has really only arisen in the past in matters related to 403(b) failures-which have been well addressed by the IRS in the 403(b) regulations.

Think about this: the tax favored status of the contributions to a 401(a) plan, and of the earnings on the fund held by the plan, are derived by the tax exempt status of the trust which receives and holds those funds under Code Section 501(a). Here is the actual languagefrom 501(a):

(a) Exemption from taxation An organization described in subsection (c) or (d) or section 401(a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.(a) .

The 401(a) trust is an actual  tax exempt organization. As a tax exempt organization, it is subject to the same basic rules which apply to any other tax exempt entity, that is, it must have a not-for-profit-exempt purpose.  An example on how this comes into play is that a 401(a) plan’s investments can be subject to Unrelated Business Income Tax under Section 512 if it invests in partnership or other business interests in such a way that is deemed to be, under the tax regs, as engaging in business activities for a profit.

Compare this to the 403(b) plan. The favorable tax status granted to 403(b) plan participants does not derive from the tax exempt status of any particular organization or entity. Instead, the statutory language makes it clear that it is derived from the contributions being made to an annuity contract, a custodial account or retirement income account that meets the rules under 403(b).  There is no requirement under 403(b) that the custodian of these funds (whether it be an insurance company or any other qualified financial institution) be treated as a tax exempt entity under 501(a) as a condition of the tax favored status of those contributions or earnings thereon. Even where the 403(b) assets are held by a custodial account, by a trust account which is designed to be a 403(b) custodial account, or by a retirement income account at a financial institution that also “custodies” 401(a) funds, the “tax status” of that trust is generally meaningless. The tax status of the funds are determined under 403(b), not 501(a).  Functionally, you see this difference in the 403(b) regulations where 403(b) plans themselves do not suffer “tax qualification” failures: it is each contract which is governed by the failure which governs the actual tax effect.

To apply the 401(a) UBIT example, this means that a 403(b) plan’s investments is not subject to Unrelated Business Income Tax under Section 512. This has generally been a distinction without a difference because 403(b) plans (except, perhaps, church retirement income accounts) could not invest in partnerships or other business interests in such a way that is deemed to be engaging in business activities for a profit.  It could only be invested in mutual funds and annuity contracts.

So how, may you ask, is any of this relevant? Its relevance arises when we assess how to implement the tremendous changes that we see on the horizon, whether it be  implementing unique lifetime income vehicles,  PEPs, collective trusts, or any other of the sort of the innovative programs being developed which are designed to enhance retirement security. A number of these changes will require a close look at the manner in which the organizational “status” of the investment or the custodian will come into play. As importantly, this serves as a reminder that these dramatic changes all require close attention to this sort of detail. After all, once again, a 403(b) in not a 401(a)…..

I had just completed a fiduciary training session for a client’s Board in South Bend, IN,  when one of the more senior board members pulled me aside to tell me a story.  His father had been employed by Studebaker when it went under in 1963-and took its pension plan with it.  As the story goes, and which I had shared earlier with the Board,  the financially struggling automaker had borrowed money from its pension fund in order to keep the company afloat. The company did not steal the funds (it was fully obligated to repay the money back to the plan) but it was a transaction in which a “prudent fiduciary”  would not have engaged. Indeed, it was only the influence of the corporate officers on the pension board which enabled the transaction.

History tells the rest: the company went belly-up, not only causing the loss of 4,000 jobs, but also their pensions. That board member discussed the horrible consequences suffered by the former employees and the community at the time. It is that bankruptcy, and loss of the pensions, which served as the “policy trigger” which resulted in the passage of ERISA some ten years later. ERISA would have prevented that disastrous loan which lead to eventual collapse of the retirement plan. It also introduced those important tools which are now central to the operation of plans like enhanced fiduciary standards, tougher minimum required funding standards, the  prohibited transaction rules and-for DB plans-pension insurance.

As awful as the Studebaker collapse was,  it does evidence the stark reality that the market virtually demands that companies (think “plan sponsors”…) either radically change or go out of business over time. Think about the following:

  • No company on the original 1928 Dow Jones Industrial Average  is part of the current DJIA.
  • Of  the five hundred largest U.S, Companies in 1957, only 74 were still part of that select group, the Standard and Poor’s 500, forty years later. Only a few had disappeared in merger; the rest either shrank or went bust. (from the “The Black Swan,” by Nassim Nicholas Taleb, Random House, 2007,” p. 22).

This all  has incredible relevance in a  market under which the “decumulation” of retirement benefits has shifted from defined benefit plans to defined contribution plans. I had written in 2009 that the demise of the DB plan was inevitable because of the rise and fall of plan sponsors. It is noteworthy that it is one thing to rely upon an employer’s current funding of the accumulation of the lifetime income benefit through its employer sponsored retirement plan; it is quite another to expect that same employer sponsored plan to actually provide the guaranteed retirement payout over the retiree’s lifetime.

This really is where DC lifetime income programs have the opportunity to provide an important advantage over the traditional DB plan.  Unlike the DB benefit, the properly designed DC program does NOT require that the plan sponsor be around for the lifetime of the retiree-portability of the DC benefit is a critical differentiator. It also means that the retiree payouts are not dependent upon the employer’s design of the payout. The innovative programs being made available in the market today include features well beyond anything that could be offered in a traditional DB plan. This includes  (but is by no means limited to) things like the elective, periodic purchase of a pension guarantees over time; the ability to access cash balances which are also funding the retirement income benefit; and a sort of equity participation which can raise  lifetime income guarantees over time.

This “advantage” does, however, require that the design actually be able to protect these DC retirement accumulations which are to be paid out over the lifetime of the retiree. The protections need to be able to be provided even with the demise of the employers which had been used to fund  the retirement benefit. It’s obvious that true “portability’ is a fundamental element, especially where there is no PBGC backing the benefit.  There are a number of different ways in which these DC programs being offered in the market accomplish this, and there are some innovative methods being developed to address this issue as well. Not all of these methods are simple, and not all of them provide the same level of protection. Understanding how these protections work  (and understanding where they may or may not be needed)  is one key to the success of this process.


With so much change continuing to be in the air, it seems all too rare to be able take the opportunity to step back to broadly reflect on all of these moving pieces. The changes from CARES and SECURE, for example, are just working their way through the system, and now we expect to see SECURE 2.0 bring a number of further dramatic changes to the market. 2.0 is fascinating in many ways, especially given that right now it is really just a mashing together of three different legislative efforts- plus some.

That reflection always seems to circle back around to the impact of the finer details of these changes. Yes, there are substantive policy initiatives driving them, yet so much of their effectiveness and broader impact seem to be wrapped up in the-sometimes-maddening details of what is being passed.

A case in point is the anticipated changes in 2.0 which will open up pooled employer plans to 403(b) plans. Professionals in this area of the practice, we all know that the current PEP rules otherwise provided under Code Section 413(e) are unavailable to 403(b) plans,

Well, Congress is taking a well crafted, though pretty unusual, approach to the manner in which it has chosen to accomplish this feat. It seems to be a recognition of the impact of the details that associate to these sorts of dramatic changes. What is noteworthy is that 403(b) PEPs are going to be enabled through changes to 403(b), and not by simply including them in the definitional sections of 413(e), and through changes to ERISA’s PEP language under Sections 3(43) and 3(44). This is critically important because had Congress chosen to simply amend 413(e), it would have opened a Pandora’s box of details which would have demanded clumsy (and perhaps extensive) regulatory fixes.

Importantly, the statutory language does not just recognize the ability of 403(b) plans to be part of PEPs. It is part of a larger recognition of the vast array of “aggregation” arrangements in which 403(b) plans of “unrelated” sponsors have engaged over the years, which may driven by things like local statues, civic organizations or by a variety of plan designs. This includes the 403(b) MEP: though the Tax Code’s MEP rules have not applied to 403(b) plans, ERISA Section 210 DOES apply, and there is a  growing body of them in the market. What 2.0 language does do is that it confirms that the 403(b) status of those plans participating in the variety of aggregation arrangements is not jeopardized by participating in them.

In addition to all of this, that same section of the 2.0 also fixes an annoying 5500 filing problem related to those 403(b) MEPs; grants “one bad apple” relief to those 403(b) arrangements which satisfy rules similar to the PEP rules of Section 413(e)(2); and provides  a few other unique features will be important to “unpack.”

So much for reflection, I guess. An important takeaway for 2.0 is that there will be an awful lot of this sort of unpacking which will  need to be done for quite a few of the changes (like “403(b) eligible” CITs) which will be brought into play.




With all of the current focus on unique programs designed to enhance the attractiveness to participants and fiduciaries of adopting lifetime income programs under defined contribution plans, there is little discussion about how all of this plays out in the 403(b) market. For sure, 403(b) plans were the quintessential lifetime income program. Heck, 403(b) is even entitled “Taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school.” I had posted a blog in 2009, describing 403(b) as one potential model for 401(k) lifetime income programs.   A quick review of history demonstrates that these employment-based annuity purchase plans (you really need to go all the way back to 1918, and then to the 1939 Tax Code, not just to 1959-when the current 403(b) section was passed into law- to get a true flavor of its history) were  originally designed to provide lifetime income. They were also the epitome of portability: in that the 403(b) contract was designed to be an individual pension, it was also deigned and administered to be highly portable.

These lifetime income programs were not without their serious flaws, especially when you attempt to overlay employer responsibility over these types of arrangements. The “portability” was also quite ugly in practice, as any one who had to administer those old 90-24 transfers will attest.

Guarantee lifetime payouts from 403(b) annuity contracts are still alive and well, particularly in the higher eduction market which is still dominated by TIAA and its insurance products.  However, with the  the now-decade-long-shift in the 403(b) market to the mutual fund based group custodial arrangements designed to mimic 401(k), where do those new lifetime income programs fit?

The answer, as always, is in the details on how a number of the critical differences between 403(b) and 401(k) programs impact the selection of a lifetime income program.  For example, one of the most popular of the lifetime income programs which was pioneered over 15 years ago in the retail market, and is now gaining popularity in the 401(k) market,  is something called the “Guaranteed Lifetime Withdrawal Benefit” or “GLWB. The GLWB, and programs like this, attempt to minimize some of the difficulties that come with the purchase of a traditional annuity, which could be referred to as the “Five Is”. These are Irrevocability, Inflexibility, Inaccessibility, Invisibility and Immobility.  In short, you pay the premium for the annuity, and you lost access to those funds (even in emergencies), and you have no chance to participate in any equity growth in the market. But what you do get in return is security: come hell or high water (as the saying goes) you will get your guaranteed monthly benefit. Period. And there is great value in that.

There is also great value to the alternatives, including that GLWB and other, non insurance based managed payout programs. It all is a matter of preference, for both the employer/fiduciary and the participant. The question for 403(b) plan sponsors and advisers is whether a retirement portfolio for participants can also include elements of the GLWB, managed payouts or other innovative programs. The answer is clearly yes. There is nothing preventing any number of the various programs in the marketplace from offering a 403(b) based lifetime income program which addresses those “Five Is.”  You will always, though,  need to keep a number of distinctive details in mind when engaging in these efforts.  This includes things like the notion that a GLWB always involves the purchase of an annuity contract-somewhere- even if made from a NAV platform;  and the fact that 403(b) plans cannot currently invest in collective investment trusts (upon which a number of these new programs are based).

Exploring 403(b) lifetime income platforms demands knowledge of the way traditional programs work, along with familiarity with the 403(b) idiosyncrasies which will be in play in the new programs.



The provision of the “Guaranteed Lifetime Withdrawal Benefit” (or GLWB) is a key element of most of the current market efforts to provide guaranteed lifetime income programs from defined contribution plans-and with good reason. The GLWB is one of a class of annuity payment programs referred to as “living benefits”  which seek to remove the “pain” of the “old time annuity”( usually referred to as the “straight life” annuity). Straight life annuities payments act a lot like the traditional defined benefit plan distributions, where the participants’ monthly benefit was generally set for life and where there was no way to access any of the funds which were used to pay for that benefit.

The GLWB addresses those problems by providing the participant at least some access to those funds in the program; guarantees lifetime benefits and minimum account values, even in changing markets; while providing the participant the ability to grow that benefit with some sort of equity market exposure. The nature of these programs requires that insurance be used. They do attach to all sorts of annuity “types” available in the retirement plan space, including Fixed Indexed Annuities, Variable Annuities, and Contingent Deferred Annuities, among others. Living Benefit guarantees also are not new to the market: versions of them  have been available in the retail market for years.

GLWBs almost sounds too good to be true, and you have to wonder how an insurance company can make this all work. Well, sophisticated mathematics is at the heart of it all.

There are actually two pieces to the math used by these programs. The first is the actual GLWB guarantees to the individual participant, themselves, which make them so attractive to plan participants and fiduciaries. These guarantees are based on actuarially determined and mathematically computed values. The amount used to compute these guarantees are far different from the actual cash value of the annuity contract carried as part of the participant’s account balance in the plan. This value is typically referred to as the “benefit base” (or something very similar),  and is the value upon which the insurer is willing to base its “living benefit” guarantees.

This then leads to the second set of sophisticated mathematics that is in play. Advanced investment hedging programs must be used by insurers in order to be able to fund these guarantees, which utilize extraordinarily complex mathematical algorithms. The secret sauce is really a combination of this math, science, sophisticated trading protocols-and sound risk management. These programs have also been around for a while, with most insurers having some sort of version of them in place even prior to 2007.

The quality of the operation of these hedging programs is not equal, as each insurer maintains their own programs with varying levels of success. It is worthwhile to note that a number of insurers were terribly stressed by the 2008 market turmoil, caused by the extreme and unexpected financial conditions which were not well accommodated by their protocols.

This is really where  the SECURE Act’s insurer safe harbor rules become invaluable. The fiduciary will be deemed to be fulfilling its obligation to assess the insurer’s  capability to back the guarantees (which would include how good they are at those those hedging activities, for example) if, at the time of the annuity contract is selected, the insurance company makes a number of representations to the plan.

Math plays a surprisingly unique role in  the successful lifetime income program. Though most of us need not be able to do the math, understanding its role in the scheme of things is part of the “fabric” with which we must be familiar.




“Retirement Plan Leakage” has been a pressing issue for policymakers and practitioners for a number of years. A report issued to the Senate Special Committee on Aging by the GAO in 2021 showed plan participants ages 25 to 55 withdrew $9.8 billion from retirement plans without rolling the account over into another qualified plan or individual retirement account. However, the most significant element of this leakage, by far arises from plan loans which default upon termination of the participants’ employment.

EBRI’s “Retirement Security Projection Model®” (RSPM”) has been used to calculate the impact of this leakage. According to EBRI, RSPM measures” retirement security, or retirement income adequacy in the United States,” and is often used to calculate the “retirement security” impact of different legislative initiatives. For example, RSPM simulated the likely impact on retirement income adequacy of three of the SECURE Act’s important provisions (that is, widening access to multiple employer plans (MEPs) through PEPs; increasing the cap under which plan sponsors can automatically enroll workers in “safe harbor” retirement plans, from 10 percent of wages to 15 percent; and covering long-term part-time employees). Taking all three of these provisions into account, the reduction in retirement savings deficits was simulated to be $114.9 billion..

There are two telling RSPM reports which help quantify the true magnitude of leakage. The first is the report that determined that the aggregate retirement deficit for all U.S. households ages 35–64 as of January 1, 2020, was $3.68 trillion.  The second report, labelled  “The Impact of Adding an Automatically Enrolled Loan Protection Program to 401(k) Plans”,, was published this past February. That report established that loan defaults prevented by automatic enrollment in loan protection (protection which would be triggered default following termination from employment) decreases that deficit by $1.96 trillion, or by 53%. This identifies loan defaults following termination of employment as being a key source of “leakage,” as well as an important element of  the nation’s “retirement savings deficit.”

The massive size of this systemic retirement security loss from loan defaults has largely gone unnoticed in the past by policymakers, plan sponsors and plan advisers because of a very simple fact: the DOL does not require this data to be separately reported on the Form 5500. These defaults are merely reported as plan distributions in Schedule H or I to the 5500, being treated-instead-as similar to and along with a successful retirement outcome. These defaults and their associated negative impact are clearly very real and should be alarming to an industry whose focus has been on “financial wellbeing” and improved retirement outcomes.

There has been a fundamental misconception about loans (which approaches a sort of “legacy” status) which has lent to the extent of this leakage. It is the pervasive notion that a participant borrowing from an individual account plan is simply and harmlessly “borrowing from themselves.” This is simply not true. Participants are actually entering into a formal commercial relationship with the plan, under which the loan is collateralized with the participant’s accrued retirement benefit in the plan. Though virtually all 401(k) plans “raise” the funds which are being lent to the participant by liquidating the participants account investments and replacing it with the value of a promissory note, there are a number of other arrangements-such as under certain 403(b) annuity contracts-where the “lent” funds are actually not actually derived from the liquidated investments in participant accounts. No matter how automated and simple a record keeper may make it to borrow from a plan, a plan loan creates a legally substantive relationship between the participant and the plan.

This means that it is the plan, not the participant which suffers an economic loss when a participant defaults on the loan, even if it’s a default which is forced simply by the employee’s separation and removal from the sponsor’s payroll system. It is the plan which does not receive the repayment of outstanding loan balance. Nothing in the statute or regulations force the plan to automatically exercise its lien on the participant’s retirement account upon the loan’s default. To the contrary, there is actually telling language from plan loan’s regulatory history which suggests that this should be the last, not the first, resort of the plan’s fiduciary. The sponsor can choose, instead, to design into its loan program the ability for the participant to continue post-severance loan repayments, and a number of plans allow that practice. Another option is to build into the plan’s loan policy the “loan protection” program which is referenced by the EBRI study. This type of program is especially useful when participants suffer “involuntary defaults” such as layoff, permanent disability or death, all essentially events beyond their control.

An automatically enrolled loan protection program of the type referenced by EBRI works by the plan sponsor adopting it as part of the plan’s written loan policy. A B2B commercial P&C insurance policy is purchased, covering the losses the plan would incur should a participant’s loan default, under clearly specified circumstances described in the policy (such as involuntary unemployment). This insurance can either cover the entire outstanding balance of the loan, or a stream of loan payments for a period of time, usually chosen for a sufficient amount of time for the participant to become reemployed. Any insurance recovery received by the plan from the insurer will then, by virtue of the language of the loan policy, be allocated to the participant’s account as a payment on the loan. The premium for the protection is a plan expense of the same nature as loan set up or maintenance fees, and can be paid in the same manner as any other loan expense. As per the EBRI report the $1.96 trillion retirement assets that are retained are net of the cost of the insurance.

Adding further gravitas to the protection of a participant’s account from involuntary loan defaults is the status of the loan held in the participant’s account as a plan investment under ERISA. As such, loans are to be treated prudently. In fact, he DOL had noted in its Advisory Opinion on 401(k) credit cards (AO 95-17), that the purpose of the participant loan prohibited transaction exemption under ERISA Section 408(b)(1) “is not to encourage borrowing from retirement Plans, but rather to permit it in circumstances that are not likely to diminish the borrower’s retirement income or cause loss to the Plan.”

That EBRI report is a rare occurrence, as it pulls the curtain aside from a long-standing, serious, but almost entirely unrecognized problem related to defined contribution plans, which dramatically impacts their ability to provide for a secure retirement. It also describes the equally rare circumstance where a dramatic change to “leakage” can be provided by the market, without the need for legislative or regulatory change.



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….


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.