Human Resource Executive online...March 3, 2010
The federal government's ostensible plan to begin selling annuities to both corporations and their employees through company-sponsored retirement plans has raised many concerns in the HR community.
By Stephen Barlas
The federal government seems ready to start "selling" annuity policies to American companies and their employees. The Departments of Labor and Treasury have asked for industry comment in an under-noticed "request for information" issued on Feb. 2 on how they can encourage employers to offer annuities to workers mostly with defined-contribution pension plans.
The concern -- especially after the 2008 market slide -- is that retirees are leaving the workforce with pensions that will be depleted before the end of their lives. Annuities, which both employers and employees have long turned their noses up at, are seen as a solution.
The RFI has produced some consternation in the business community, which is worried that the Obama administration might issue some sort of mandate, or de facto mandate, with regard to the inclusion of annuities in pension offerings. Kathryn Ricard, vice president for retirement policy at the ERISA Industry Committee, predicts a lot of businesses and trade association will respond to the RFI. Besides opposing any mandates, employers will argue that any new latitude for corporate "encouragement" of annuities should be done via clear rules, particularly in the area of company liability.
Besides the mandate and liability issues, employers will be worried about any additional costs they might face from incorporating annuities into pension offerings. Jody Strakosch, national director for MetLife's retirement products group, acknowledges that there may be corporate costs associated with establishingrecord-keeping platforms whereby corporate 401(k) managers such as Hewitt, Mercer and Vanguard increase their charges to reflect the additional cost of keeping up with the annuity portion of an individual's defined contribution plan.
But Strakosch doesn't think those costs would be substantial.
The Treasury, through the Internal Revenue Service, and Labor, through the Employee Benefits Security Administration, could conceivably change federal rules on either taxation and or ERISA without congressional action.
Modifications could be as simple as changing EBSA's Interpretative Bulletin 96-1, which details four general "safe harbors," pension-related areas that companies can educate employees about without straying into "investment advice" for which liability would be a concern. The Federal Register notice the two departments issued in conjunction with the RFI alluded to two ERISA Advisory Council reports issued in the past few years that endorsed the updating and expanding of 96-1 to respond to innovations in the financial marketplace as well as the baby boomer generation's move into the de-cumulation phase of their pensions.
Both Phyllis Borzi, assistant secretary at the EBSA, and Mark Iwry, deputy assistant Treasury secretary for retirement and health policy, have spoken publicly about wanting to encourage greater use of lifetime payments as part of pension plans.
"They have both told us that bigger changes will require legislation, but that this is the beginning of the process," says Ricard. "The chances of them moving forward on this are very high. The fact [that] you saw them working together on this detailed RFI -- which contained 39 questions -- this early in their tenure showed they are pretty invested in this."
Both Ricard and Robyn Credico, director of the plan-management group in North America for Towers Watson, say companies have included annuities in pension-plan offerings in the past, but that take-up has been minimal, and for a number of reasons. Those include the often-confusing nature of the policies, their cost, difficulty of comparing products and concern that a policy holder might die soon after buying an annuity, and the more recent concern, buoyed by the AIG headlines, that insurance companies could fold, making any annuities worthless.
Beyond those concerns, adds Credico, companies that listed annuities in their plan documents either didn't know how to deliver them or else had a hard time finding a provider. "Now we all decide that it is a good idea to put annuities back in pension plans," she says, chuckling. "It is like fashion, where the lengths of hemlines change."
Credico does note, however, that insurance companies have reworked their annuity offerings to respond to some employer/employee concerns. For example, some policies offer death benefits. In fact, MetLife and Prudential, among the major annuity providers to employers, have -- over the past half-decade -- offered a number of new annuity products with various wrinkles.
Strakosch points out that, when 401(k) plans became popular a few decades ago, some plan participants were confused about the differences in equity classes and how mutual funds work. She says the confusion about annuities is at that same point, and will be erased as companies and industries do a better job of educating and communicating with employees.
Comments on the RFI are due May 3, 2010; see:
March 3, 2010