My DOL Wish List for Guaranteed Lifetime Income Options in 401(k)s

As an accumulation mechanism, the 401(k) has certainly become America's savings plan. It's now time for the industry, providers and manufacturers, the government - DOL and advisors to create a new retirement mechanism for America's savers, a "paycheck for life system, that will offer America's workers a secure financial future by providing a guaranteed income for life.

Success for this option inside the 401(k) plan is building traction. Both the IRS and DOL seem to agree that the time is right to offer participants a distribution option, which provides them with guaranteed income payments  - "paychecks for life." They have issued a request for information (RFI) that could catapult changes supported by the federal government to facilitate the uses of guaranteed lifetime income options in the defined contribution plan space.

The RFI requested public responses to 39 questions, covering a wide variety of topics that will help the IRS and DOL determine the extent to which the federal government should facilitate the use of guaranteed lifetime options and how they should do it. Hundreds of comments were submitted and the agencies are now evaluating these submissions.

Regardless of the outcome, one thing is certain: 401(k) participants need credible and reliable guaranteed income solutions INSIDE the 401(k) plan to help them create a paycheck for life for their retirement years. Plan Sponsors/Fiduciaries need protection similar to that offered by the DOL in the Pension Protection Act, if they are going to offer these complex products and riders inside the 401(k) plans that they are deemed responsible for! And the advisor community needs a road map on how to educate employees on fiduciary protection, as well.

While there are numerous issues to be addressed, here is my "wish list" for the DOL:

Mandate the Guaranteed Income Option:  Make available guaranteed income options in the 401(k) plan by enacting legislation "mandating" that the 401(k) and any other individual account defined contribution plans offer a guaranteed income option. Don't make it an option to NOT have the option. Let's legislate the "guarantee" back into the retirement plan, as it was in the defined benefit days.  This would not force a participant to elect the guaranteed-income option as the only distribution option in the plan. Lump sum would still be an exit strategy. Rather it would ensure that all participants had at least one, if not more than one, guaranteed income option other than the lump sum.

Fiduciary Protection: Make the selection of the lifetime income option by the plan sponsor a " non-fiduciary "option, or at best provide fiduciary protection for the plan sponsor similar to those offered by the Pension Protection Act for QDIA and other "default options." Currently, the DOL has long held that the selection of an annuity option is a fiduciary act and further that the fiduciary is obligated to periodically monitor that provider. A few years ago, the DOL issued a proposed regulation for the selection of a provider for an annuity option in a defined contribution plan. The regulation, as proposed, mandated 14 separate items a fiduciary must consider to make a prudent selection of an annuity provider within the meaning of ERISA section 404. This mandate amounted to an automatic "gag" order and the certain death of annuity options in any ERISA plan!  To the extent that the selection of an annuity (or guaranteed income) provider is more burdensome than the selection of any investment option or plan service provider, fiduciaries will never consider annuities for inclusion in the plan. I can just hear a plan sponsor's ERISA attorney now, "Are you crazy; do you realize the liability you would assume by adding this guaranteed income product to your 401(k) plan!  What happens when the insurance carrier underwriting the guaranteed income 40 years from now for your employees goes out of business and the plan participant's widow sues you (or your estate since you may not be around either)! "The DOL did make significant changes to the final regulation, which provides a safe harbor for fiduciaries, providing that they will have fully met the prudence requirements of ERISA section 404(a)(1)(B). I don't know about you, but even with these improvements, my phone still isn't ringing off the hook from plan sponsors saying, "Wow these new regulations are a great improvement; I feel safer now, let's go ahead and add that valuable guaranteed income benefit for all my employees." The DOL has miles to go before my plan sponsor fiduciaries can sleep!

Education and Advice to Participants: It is clear from comments in the RFI that a key component voiced by the industry for the successful implementation of a guaranteed income option is participant education and advice. You and I, my dear advisors, will be (and continue to be) the success to any implementation of these options. The continued issue, however, is that plan sponsors have long been nervous about providing advice fiduciary advice to participants. The DOL's 1996 Interpretive Bulletin 96-1 on providing Education without Advice has not done much to solve this problem. When retirement plans include a guaranteed lifetime income distribution option, participants will need and demand assistance in deciding what type of distribution option is best for them and their beneficiaries. And plan sponsor fiduciaries and advisors will need protection in offering this education and advice! The DOL should clarify and extend IB 96-1 to permit plan fiduciaries to provide participants with information on issues relating to the distribution stage, including estimating the amount of money needed and calculating the best method to ensure that retirement savings provide income through retirement.  As a wish list item, I would request the DOL create guidance as to how the advice to participants, regarding the use of a guaranteed lifetime income distribution option is non-fiduciary.

The time has come for guaranteed lifetime income benefit options to be the norm inside employer sponsored retirement plans.  All studies show that America's workers want the protection and guarantees afforded by these products. The manufacturers have the financial ability and expertise to craft viable lifetime options and with the capitalist system, the means to create competitive products. The advisor community is the best educated in the world to assist employees in making the right decisions. All that stands in the way is the "liability" issue. The DOL can provide the protections necessary to encourage the implementation of these valuable benefits, 

Member Spotlight: Tony Bruns   

Tony Bruns, Vice President at The Pinnacle Group, started the Year 1 Program in 2008 and has continued his 401k Coacheducation by completing the Year 2 and Masters Programs. "I think these programs, taken together, build momentum," Tony says. "My fellow owners and I look at the Coach Program as an investment, and it has certainly paid for itself. " Since 2008, The Pinnacle Group has grown its assets by 30% and its number of plans by 15%. "In fact, 2010 was the best revenue year we've had at Pinnacle," he says, "and I can attribute that to the tools and capabilities we've learned through The 401(k) Coach Program."

At a recent webinar, Tony had some advice to share with the attendees. "At The 401k Coach Programs, we've learned to segment our business, figure out which clients are providing income and opportunities, and get rid of the rest." The Pinnacle Group is able to differentiate their services by scheduling their due diligence meetings 12 months in advance. By bringing a service plan to each meeting, Tony details for his clients exactly what they are going to do over the next year. "By articulating our process, solutions and services," he says, "we've been able to charge more. "

Tony attributes much of his success to The 401k Coach. "One of the great things about the Program is that it holds you accountable for making real changes in your business," he explains. "By going through the Program, you meet with other like-minded, goal-driven advisors who will also hold you accountable. There's really a 401k Coach community across the country that supports each other. It's been a great experience, and I plan to stay involved with The 401k Coach in the future."

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