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Are you ready for your client to be compelled to provide an annuity payout?


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According to Pensions & Investments, the House Ways and Means Committee this week will consider legislation that would “require plans to offer participants with more than $200,000 in their accounts an option to take a distribution of at least 50% of their vested account balance in the form of a protected lifetime income solution.”

House Committee to consider requiring employer-sponsored retirement plans | Pensions & Investments (pionline.com)

What do BenefitsLink mavens think about this?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Back when I worked with MPPs or PSPs with an annuity option I had been in the industry for a good 15 years.   I think I saw 1 person take an annuity that whole time.  I will admit the universe of plans offering annuities was pretty small so the results couldn't have been large.   But I have seen no actual interest for this option over the years.

It would be interesting to hear from the DB folks: how many people who have a lump sum option or an annuity option take the lump sum vs annuity.  I always got the impression from the DB I know that if a lump sum was offered it was taken way more often than the annuity.    As in something like a 90% vs 10% type ratio.   I could be wrong as I wasn't taking a formal survey.  

So such a law will increase the number of plans offering it but I doubt it starts a trend. 

On the other hand the annuity disclosures for MPPs and PSP with annuity options were a huge pain to prepare and send it.   So my guess is it will increase costs without much benefit.   But I might be a cynic.  

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Most of us can describe evidence, some anecdotal and some with more rigor, that few participants in employment-based individual-account retirement plans (besides those of charities, schools, and governments) choose an annuity payout.

The legislative idea says that a participant ought to have an opportunity to get an annuity, and to get it from one’s employment-based plan.

(Those who want an annuity can get it by first directing a rollover into an IRA.  Many insurance companies would gladly sell a § 408(b) Individual Retirement Annuity.)

About the plan-administration expense of illustrating annuity choices and getting a spouse’s consent, would that expense be lessened somewhat by not allowing choice for the larger number of participants who lack a $200,000 balance?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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28 minutes ago, Peter Gulia said:

The legislative idea says that a participant ought to have an opportunity to get an annuity, and to get it from one’s employment-based plan.

 

About the plan-administration expense of illustrating annuity choices and getting a spouse’s consent, would that expense be lessened somewhat by not allowing choice for the larger number of participants who lack a $200,000 balance?

I have only once had to even start down the road of helping a client get an annuity for a payment.   A person asked what an annuity would look like and the conversation was serious enough that the plan sponsor has to actually get quotes from insurance companies.   What I remember most from that was all the fiduciary concerns.   What if the insurance company goes bankrupt and the plan has to still provide the annuity amount?   In the end the person choose a lump sum so it was all wasted time.    We billed it anyway but it was wasted time. 

You would hope (I know dumb hope) that any such rules would give some clarity on the fiduciary liability in that situation. 

Yes, the balance size would reduce the cost.   And maybe if it became a requirement people would start to automate the process as it would final be worth the investment.   I just remember even one notice could take 20-40 min to get estimated annuity amounts.   Get them loaded into a letter to the person.   Everyone getting happy that there was enough cover your hind end language that the estimate as just an estimate and if they asked for annuity the monthly amount could change.   Like I said you might create the form letter and plug the annuity factors in software or a spreadsheet to allow for a mail merge to cover that.   But whatever time you spend would most likely be a waste since almost no one will choose the annuity based on history.  

I guess I am just not impressed with the idea but congress has to prove they are "doing something to solve problems"! 

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16 minutes ago, ESOP Guy said:

I guess I am just not impressed with the idea but congress has to prove they are "doing something to solve problems"! 

Agreed. This is being driven by behavioral economics - the book "Nudge" and others - and unfortunately grand thoughts don't work so well when you try to put them into practice, as the anecdotal evidence above indicates.  Sucks for us.

Ed Snyder

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ESOP Guy, Bird, and BG5150, thank you for your helpful observations.

This call for a “lifetime income” provision would be neither an ERISA title I command nor a condition for a plan’s tax treatment.  Rather, a participant’s opportunity to get an annuity would be one of six elements of an “automatic contribution plan or arrangement” an employer (of more than five employees) would maintain if it prefers an excise tax not to apply.

https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/Subtitle%20B%20Retirement%20Committee%20Print.pdf

The excise tax “on any failure with respect to an employee [would] be $10 for each day in the non-compliance period with respect to such failure.”  For example, if there are 100 affected employees and not maintaining a satisfactory arrangement persists for a whole year, the excise tax would be $365,000.

At least Insured Retirement Institute has announced support for the provision.

Some lobbying positions might be somewhat muddled because some organizations that otherwise might oppose a requirement for a “lifetime income” provision might tolerate it to support the push that an employer should make facilitate a retirement-savings opportunity.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Y'know, if it weren't legislatively mandated, such a provision would otherwise be a benefits/rights/features issue, right? Seems inconsistent with general principles of fairness.

Now, having previously worked for an insurance company decades ago where annuities, at that time, were REQUIRED as a portion of the plan's investments in order for us to do plan administration, I agree fully with the experiences above. In all my many years there, I saw a grand total of 3 annuitizations in Defined Contribution plan payouts.

Hopefully this proposal will go nowhere. Total waste of time. As Peter said, anyone wanting an annuity can buy one with their distribution proceeds.

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1 minute ago, Belgarath said:

Y'know, if it weren't legislatively mandated, such a provision would otherwise be a benefits/rights/features issue, right? Seems inconsistent with general principles of fairness.

Now, having previously worked for an insurance company decades ago where annuities, at that time, were REQUIRED as a portion of the plan's investments in order for us to do plan administration, I agree fully with the experiences above. In all my many years there, I saw a grand total of 3 annuitizations in Defined Contribution plan payouts.

Hopefully this proposal will go nowhere. Total waste of time. As Peter said, anyone wanting an annuity can buy one with their distribution proceeds.

Its just a small part of a much bigger legislative text, but yea I would like to have this one taken out as well.

There are other parts that are much more "exciting"

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Agree with well-stated thoughts above. Like most things, there is a place, however limited, for the product. I have thought that it basically protects the recipient from his/her own investment inexperience/ignorance/inertia in some cases. 20 years ago we market-priced annuity products quite often for DB plans that were terminating---but I've never in 45 years of consulting seen a DC plan participant ask for it.

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I hope someone patient will forgive my ignorance. I have never encountered a DC or cash balance plan participant who actually wanted an annuity form of payment. I'm not involved in day-to-day plan administration either.

Here goes:

What actually happens when someone wants an annuity payout? 

Is the obligation fundamentally for the plan to provide the participant's account balance in the form of an annuity (without a commercial annuity provider)? Does this differ when the plan is a DC plan vs. a cash balance plan? In other words, could the plan itself provide annuity payments on its own?

If the plan will buy an annuity, is the annuity owned by the plan itself (and its payments used by the plan to pay the participant)?

Does the cost of the annuity have to equal the account balance exactly? What happens if the annuity providers charge more for a similar benefit - is it just the best the plan can buy with the amount equal to the participant's account balance? If not, who pays the difference?

Thanks in advance.

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35 minutes ago, EBECatty said:

Is the obligation fundamentally for the plan to provide the participant's account balance in the form of an annuity (without a commercial annuity provider)? Does this differ when the plan is a DC plan vs. a cash balance plan? In other words, could the plan itself provide annuity payments on its own?

If the plan will buy an annuity, is the annuity owned by the plan itself (and its payments used by the plan to pay the participant)?

Does the cost of the annuity have to equal the account balance exactly? What happens if the annuity providers charge more for a similar benefit - is it just the best the plan can buy with the amount equal to the participant's account balance? If not, who pays the difference?

I might be over my own skis on this but in a DB environment, a plan could make the annuity payments (the monthly payment is a known amount) and in fact large plans will do this.  In a DC environment, the plan would buy an annuity with the available account balance (yes it just the best the plan can buy with the amount equal to the participant's account balance) and essentially off-load that responsibility to the insurance company.  Similarly in a small DB environment the plan would buy an annuity but now you are buying a specific monthly benefit and paying the insurance company whatever lump sum is required to do that.

When you buy an annuity it is reported on the 5500 as benefits paid (including direct rollovers and Insurance premiums to provide benefits).  At least that's how we did it the one time it happened, which I found fairly quickly.

Ed Snyder

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Further, an individual-account plan might provide that, beyond a choice to take an annuity rather than a single sum or other payout, the selections of the insurer and of a particular contract among those an insurer offers (and not contrary to the plan) are the participant’s or other distributee’s decisions (unless obeying the distributee’s direction would be inconsistent with ERISA’s title I).

Opinions might differ on whether such a provision could cause a plan not to meet the condition of proposed Internal Revenue Code § 414(aa)(7):  “A plan or arrangement shall be treated as meeting the lifetime[-]income requirement described in this paragraph if the plan or arrangement permits participants to elect to receive at least 50 percent of their [sic] vested account balance in a form of distribution described in section 401(a)(38)(B)(iii).”

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thank you both - very much appreciated. If I can follow up with a few more specific questions:

In a DC plan, does the calculation differ based on whether (1) the plan's normal form of distribution is a QJSA, or (2) if the normal form is not a QJSA, the participant voluntarily chooses to use his or her vested account balance to purchase an annuity in a complete distribution? In other words, in both scenarios, do you simply buy the best annuity you can with the participant's actual account balance? Or does a QJSA require a specific benefit level such that buying an annuity providing those benefits from a commercial provider might cost more than the participant's actual account balance?

Similar question for a CB plan. Does the participant's hypothetical account balance produce a specific annuity benefit level requirement such that the plan has to buy an annuity (regardless of its cost) to support that participant's benefit entitlement? Or is it simply, again, buying the best annuity based on the participant's hypothetical account balance (regardless of the annuity's ultimate benefit level)?

Again, thank you.

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The CB plan has an actuarial equivalence definition to determine the monthly benefit.  If the plan writes it own monthly checks, there ya go.  Otherwise, an outside insurer would charge its own proprietary amount to make those monthly payments.  (Higher or lower than the theoretical balance.)

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Leaving aside church plans and governmental plans, an annuity under or from an individual-account (defined-contribution) retirement plan—whether a qualified joint and survivor annuity, qualified optional survivor annuity, qualified preretirement survivor annuity, or something else—is what results from using the distributee’s account balance (or the portion of it the distributee uses to get an annuity).

A typical individual-account plan does not provide a benefit subsidized by the employer, or that invades others’ individual accounts.

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Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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As a retired TPA utilizing lifetime income, I've got a different perspective (although as a TPA, I'd be complaining about another PITA requirement).  The industry's come a long way since funding plans with a life insurance contract and an annuity for the side fund (that dates me).  Lifetime income no longer requires annuitization - many LI plan solutions take the form of a Variable Annuity (allowing flexibility and surrender-ability) with Guaranteed Lifetime Withdrawal Benefit rider.  An example would be John Hancock's GIFL feature.

As TPA's we're very focused on the accumulation phase of retirement planning - turns out that it's the easy part.  The hard part is decumulation - so you don't outlive your money.  Lifetime income is a great tool for decumulation and it seems (from my reading) that a lot of effort and energy is being directed to develop new and innovative LI solutions some of which are no/low fee products.

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28 minutes ago, Retired, but still reading said:

As TPA's we're very focused on the accumulation phase of retirement planning - turns out that it's the easy part.  The hard part is decumulation - so you don't outlive your money.  Lifetime income is a great tool for decumulation and it seems (from my reading) that a lot of effort and energy is being directed to develop new and innovative LI solutions some of which are no/low fee products.

This is all correct. But, to me anyway, this is the investment advisors job and not the TPA's. All the annuity options galore can be illustrated and explained and sold by the investment advisors. But, because the requirement will end up on the plan, it will slide to us to implement. Exhausting.

William C. Presson, ERPA, APA, QPA, QKA, APR
bill.presson@gmail.com
C 205.994.4070
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1 hour ago, Bill Presson said:

All the annuity options galore can be illustrated and explained and sold by the investment advisors. But, because the requirement will end up on the plan, it will slide to us to implement. Exhausting.

So in other words, grandfathered plans will be a sought after commodity for exhausted TPAs!

 

 

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And for those employers that don't yet maintain a plan and might prefer not to be burdened by an automatic-contribution arrangement, should the salespeople say one needs to create a plan now or soon so it will be in effect as of the date of enactment?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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2 hours ago, Peter Gulia said:

And for those employers that don't yet maintain a plan and might prefer not to be burdened by an automatic-contribution arrangement, should the salespeople say one needs to create a plan now or soon so it will be in effect as of the date of enactment?

I already have...  I have a couple of employers dragging their feet (maybe next year...) but they really need plans for several reasons.  I have told them that between SECURE 2.0 and the bill being marked up now, the window is closing. Its clear that this is happening, its just a matter of time. 

 

 

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