Federal agencies review retirement plan regulations, promote annuity

Concerned that at retirement employees overwhelmingly choose lump-sum distributions from their 401(k) accounts and even their traditional pensions, thus leaving themselves with the responsibility of managing their own investments through their elder years, the White House Middle Class Task Force Report published last month urged plan sponsors to include lifetime income stream products - annuities - as options in retirement plans.

The U.S. Department of Labor and the Treasury Department now are looking at whether or how rules of the Employee Retirement Income Security Act (ERISA) and the plan qualification rules under the Internal Revenue Code might facilitate access to these products.

The agencies have issued a Request for Information (RFI) soliciting public comment. The RFI asks a series of questions about issues including plan design, behavioral strategies that could foster the selection of lifetime income strategies, and potential legal issues in providing investor education and changes that might be required in Internal Revenue Service regulations to accommodate those products.

The task force's report also urged plan sponsors to "make unbiased investment advice available to workers, helping workers avoid common errors that undermine retirement security, while providing strong protections against conflicts of interest."

Following are highlighted questions posed by the agencies in their RFI:

Section 11

The RFI asks first for descriptions of lifetime income arrangements that are currently available, and information about the costs, advantages, and disadvantages of the products.

Although the document refers to the General Accounting Office and other studies on this question, the RFI then asks why the majority of retiring plan participants chooses a lump sum distribution over an annuity option. "Can or should the 401(k) rules, other plan qualification rules, or ERISA rules be modified, or their application clarified, to facilitate the use of behavioral strategies in this context?"

Questions about behavioral strategies that are in use by plan sponsors or are considered promising as a means of encouraging more selections of lifetime income are the focus of the following questions. Within the text of the questions, the FRI describes some strategies that could be used. Plans could include the "use of default or automatic arrangements (similar to automatic enrollment in 401(k) plans)," the RFI states, and a focus on other ways in which choices are structured or presented to participants, "including efforts to mitigate all or nothing choices by offering lifetime income on a partial, gradual, or trial basis, and exploring different ways to explain its advantages and disadvantages."

Sections 12 to 14

Plan sponsors and the public are asked how the annuity option should be structured. How should participants decide what portion of their account to annuitize, should the lifetime income option be the default option, and should it apply to the whole balance?

The RFI asks about the impediments to plan sponsors' including lifetime income options in their plans. Would these arise from "401(k) or other qualification rules, other federal or state laws, cost, potential liability, concern about counterparty risk, complexity of products, lack of participant demand?"

Sections 18 and 19

Within a broad category called Participant Education, the agencies ask if there is need for clarification about the extent to which plan assets can be used to pay for providing information to help participants make informed decisions. The RFI also asks what specific legal concerns plan sponsors have about educating participants as to the advantages and disadvantages of lifetime income or other arrangements designed to provide a stream of income after retirement, and what actions, regulatory or otherwise, the agencies could take to address such concerns.

The RFI asks to what extent plan sponsors should be encouraged to provide or promote education about the advantages and disadvantages of lifetime annuities or similar lifetime income products, and what guidance would be helpful to accomplish this.

Section 21

One area of disclosure that could present problems for plan sponsors, the document suggests, is the ERISA Section 105 requirement that defined contribution plans furnish an individual benefit statement to each participant, at least annually, that includes the participant's ``accrued benefits,'' i.e., the individual's account balance. For example, the RFI asks if the individual benefit statement should present the participant's accrued benefits as a lifetime income stream of payments, in addition to presenting the benefits as an account balance.

Detailed questions focus on actuarial assumptions and computations.

Sections 27 and 28

Respondents are asked for information relevant to IRS regulations that apply to annuities or IRS qualification rules for 401(k) plans. Specifically, one question asked whether the IRS should provide further guidance to clarify the application of the qualified joint and survivor annuity rules or other plan qualification rules to arrangements in which deferred in-plan insurance annuities accumulate over time with increasing plan contributions and earnings.

How IRS required minimum distribution rules might affect defined contribution plan sponsors' and participants' interest in the offering and use of lifetime income is another question raised.

Sections 30 to end

Finally, the public is asked for comments on fiduciary safe harbor issues, ERISA Section 404(c) default options, comments regarding economic analysis, Regulatory Flexibility Act, and the Paperwork Reduction Act.

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