SECURE Act and Guaranteed Income (Part 3)
There are two parts of the SECURE Act that I believe will have the greatest impact on my clients: plan sponsors and plan service providers. The first includes the provisions on retirement income, including the safe harbor for selecting a guaranteed income provider, the ability to distribute guaranteed income investments if a plan no longer want to offer those products, and a new requirement to give participants projection of their retirement income. The second impactful part is the authorization of Open MEPs (Multiple Employer Plans), which the law calls “PEPs” (or Pooled Employer Plans). That change will allow financial institutions to sponsor plans that can be adopted by multiple (or even many) unrelated employers, transferring much of the fiduciary responsibility onto the financial institution.
Part 1 discussed the fiduciary safe harbor for selecting an insurance company to provide the guaranteed retirement income products for defined contribution plans (e.g., 401(k) plans). Part 2 covered the common guaranteed products in 401(k) plans under the pre-SECURE Act rules.
This article talks about two practical issues: (1) the need for the guaranteed retirement income products to be on recordkeeping platforms, and (2) the role of plan advisors in helping 401(k) fiduciaries understand and select the insurance company and the product.
On the first point, in order to an investment product to be in a 401(k) plan, it must be on a recordkeeper’s platform. Then, plan fiduciaries select the investments for their plans from the options on the platform. The typical recordkeeper has hundreds or even thousands of available investments, and the fiduciaries typically select 15 to 25 for their plans. The participants select from those 15 to 25 or are defaulted into an investment on the platform (usually the age-appropriate target date fund). The recordkeeper accounts for those investments, and any changes, and provides daily valuations to the participants (as well as quarterly statements).
The same will hold true for guaranteed income products. While there won’t be thousands of alternative guaranteed products (and in some cases there may only be one . . . at least in the near future) on a recordkeeper’s platform, plan fiduciaries will need to decide whether to add one or more of the guaranteed options on the recordkeeper’s platform to their plan line-ups. Once added, participants will be decide whether to add a guaranteed option to their accounts (or, perhaps, may be defaulted into a QDIA—qualified default investment alternative—that includes a guarantee).
So, the first step is for insurance companies to get their guaranteed products on recordkeeping platforms.
Of course, a guaranteed product could also be available only as a distribution option, but even there, if it is in the plan as a distribution option, it would need to be coordinated with the recordkeeper’s services (e.g., the materials distributed to participants and the call center).
As a result, if insurance companies want to provide guaranteed income products to 401(k) plans, they will need to coordinate with recordkeepers to be placed on their platforms and will need to provide information and services to support the disclosure requirements and recordkeeping services.
The Role of Advisors
What about the plan’s advisor? There will be several jobs for advisors. Here are three:
The SECURE Act requires that plan fiduciaries evaluate the cost of the guaranteed product. Of course, the cost is directly related to the features of the product. As a result, plan sponsors will need help in understanding the costs and features, and in properly evaluating those factors. In all likelihood, and in due course, there will be benchmarking services to help with that.
While the SECURE Act has a fiduciary safe harbor for the selection of the insurance company, plan fiduciaries must obtain specified information about the insurance companies that are being considered. Most plan fiduciaries won’t know what information to collect and, even if they have a list, they may not be able to determine if the packages of information from the insurance companies cover all of the requirements. Advisors can play a critical role in satisfying this compliance requirement.
And, even though the SECURE Act has a safe harbor, it is likely that plan fiduciaries will want to know that an insurance company is financially strong. Advisors can help plan fiduciaries vet the insurance companies that they are considering.
The SECURE Act clears the path for plans to offer guaranteed retirement income to participants. That is a critical improvement over current law. While it is possible to disagree with the criteria that Congress chose for the safe harbor, it’s hard to disagree with the policy of improving outcomes for retirement income. In my view, this change is likely to lead to high quality, institutionally priced guaranteed products in retirement plans. It is likely that, over time, many plan sponsors will add those products to their plans. It remains to be seen if participants will decide to use them. Even there, and in due course, I expect that guaranteed products will become more popular with both plan sponsors and participants.