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It is important to understand that
this is a safe harbor specifically
for selecting a provider and
not for selecting the retirement
income product.
products, " he says. " In those cases, it's important [for the
committee] to work with an outside consultant who can [explain]
different options and help it do the analysis required to make a
decision. This is an area where it probably makes sense to consult
with an expert before proceeding. "
Part of the fiduciary role will be researching what types of
lifetime income options would best serve the plan's participants,
Campbell says. " Fiduciaries need to ask, 'What are the kinds of
things that will match up with what our participants need?' " For
example, is there value in participants paying a higher fee to have
upside potential that could lead to larger monthly payouts?
To ensure they fulfill their fiduciary duty, some committees
will decide to go through a formal request for proposals process to
gather all the necessary information, Campbell says. " It's basically
the same process you use for other investments. "
During the exploration phase, Delaney says, it is crucial to
scrutinize the plan's employee demographics. " You [have] to get a
feeling for what their needs and wants are, " she says. She suggests
waiting to survey employees as to their interest in a retirement
income option until the plan adviser has conducted retirement
planning workshops for pre-retirees. " That's when we get better
feedback on what they need, " she says.
Predicting whether employees will want annuities in their
retirement plan is challenging, says Erik Daley, managing principal
in advisory firm Multnomah Group in Portland, Oregon.
" I'm not sure there's a huge groundswell of participant interest
in having a retirement income option in-plan, so I don't think
surveying participants works very well, " he says. " As far behind
on the learning curve as plan sponsors are on this, participants are
much, much farther away. "
The Decisionmaking Phase
Committees that have explored retirement income solutions will
find a range of available approaches at a range of costs, Roberts
says. " Some solutions are more straightforward than others, and
some are more complex. Some solutions are more opaque, and
some are more transparent, " he says. " Ultimately, it's up to the
plan committee to deliberate on the pros and cons of each. " Is a
plan's participant base likely to understand a more complex or less
transparent option, for instance?
Among the different types of products, there are trade-offs
in the degree of guarantee that participants will get, the potential
for upside in the payout, and the fee, Campbell says. One plan's
participants may be better served by paying a somewhat higher
fee for a lifetime income product that includes upside payout
potential. Another employee base might do best with a simpler,
lower-cost option that has a fixed level of income to help pay their
retirement living expenses.
" There are different products designed to address different
variables, " Campbell says. " For fiduciaries, much of the decisionmaking
is about balancing those competing interests. "
The SECURE Act safe harbor requires that plan fiduciaries
appropriately consider the cost, including fees and commissions,
of the annuity contract in relation to the benefits and administrative
services provided. Committees need to understand that
these products can have both explicit and implicit fees, Campbell
says. Sometimes all fees are built in, and other times some are
expressed as separate charges. For example, for a lifetime income
product that includes upside payout potential, and thus higher
asset-management costs, one provider may include asset management
in the overall fee, while another may break it out.
Campbell says plan committees must understand the " lock
up " fees some options include; these apply if a participant terminates
the contract within a certain period of time. An annuity
contract may include a surrender period of a specified number
of years, during which a participant pays a penalty to break the
contract. But that same option may, in return, provide a guaranteed
rate of return that is higher than a product that has no
surrender period. Is it worth it, for your plan's participants?
" At the end of the day, much of that is a judgment call for a
committee, " Campbell says. " There is no one right answer. " The
right answer is based on what works best for that plan's participants.
If the participants tend to stay in the plan for life, that may
make the surrender charge less of an issue, he says.
As a committee debates whether to add an in-plan option,
the fiduciary obligation to document the process is crucial. " The
linchpins of a procedurally prudent decisionmaking process are
to gather all the relevant information, consult with experts as
needed to make a decision, and carefully document the process, "
Roberts says. " Documenting in the committee minutes the steps
the fiduciary took to make sure its decision was prudent is very
important. " -Judy Ward
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