Evaluation guide sections

Responsibility and opportunities   |   Selection and implementation   |   Oversight and monitoring   |   Portability

Once you understand your participants' needs, it's time to look for guaranteed lifetime income solutions that can help. There are a few things to consider as you select and add a solution to a retirement plan's investment lineup.

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Selecting a guaranteed lifetime income solution
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Guaranteed lifetime income solutions generally involve an insurance company in some capacity due to the guarantee component. As issuers of annuities, these insurance companies are already familiar with the concept of lifetime income solutions. Plan fiduciaries should:

  • Conduct an extensive search and identify several insurers who support guaranteed lifetime income solutions available as an investment in a retirement plan fund lineup
  • Document the process — It's important for plan fiduciaries to capture any actions they take on behalf of a plan, whether it's exploring options and/or making decisions; by capturing the process taken to reach an outcome instead of the outcome itself, a plan fiduciary exemplifies the prudent person standard defined by ERISA
  • Look to insurance company rating agencies that analyze the financial viability of the issuing company; these rating agencies include AM Best Company, Standard & Poor's, Moody's Investors Service, and Fitch Ratings; each of these agencies rate insurance companies based on criteria including but not limited to:
    • The company's financial statistics
    • Ability to meet financial obligations and claims of their policyholders
    • Liabilities
    • The states where they do business
    • The quality of their investments
    • How long they have been in business
    • Their offering of investment options
  • Contact your state insurance department regarding the financial credibility of any issuing company
  • Go to the National Association of Insurance Commissioners (NAIC) website to conduct a search to determine whether there are or have been any complaints filed against the issuing company
  • ALIRT Insurance Research monitors the financial health of insurance carriers; utilize the ALIRT website to help meet your due diligence requirements

Guaranteed lifetime income solutions can take different forms, including guaranteed lifetime withdrawal benefits, deferred-income annuities and immediate fixed-income annuities. When assessing various solutions, make sure you're comparing like with like.

Plan fiduciaries should pay particular attention to the features of the solution. Each solution will generally have a detailed brochure that explains how the solution works, including:

  • How the income is calculated
  • When the guarantees associated with the solution become payable
  • What the payout options are
  • Whether there is a residual death benefit associated with the solution
  • Withdrawal options and the impact to the income base if withdrawals are made

To guarantee a stream of income that will last for the participant's lifetime, there will be fees associated with the guarantee. Just like most things, the least expensive solution might not always be the best solution. When assessing the fee structure of a guaranteed solution, you may want to consider the following fees: fund management, surrender charges, fees assessed at the participant level for the guarantee, fees assessed at a plan level to incorporate it into the lineup, mortality and expense charges, and the overall costs of the guaranteed feature (whether a guaranteed lifetime withdrawal benefit, deferred income annuity or immediate fixed income annuity).

Adding a guaranteed lifetime income solution to a retirement plan
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There are several governing documents pertaining to your retirement plan (e.g., the plan document, adoption agreement and summary plan description, to name a few). Generally, it's a good practice to review these documents on an annual basis. However, circumstances, such as legislative impacts or other changes to your plan, may arise that would require you to review them more frequently.

While not required, many retirement plans will utilize an Investment Policy Statement. This document will define what the available investment options will be for participant directed plans, as well as the investment objectives for the plan. Anytime a new investment option is added or removed from the investment lineup, this document should be amended accordingly.

As a best practice, plan fiduciaries should perform annual plan reviews with their financial professional, third-party administrator and/or legal counsel to ensure that their document is up to date with all enacted legislation and continues to meet the goals and objectives previously determined for the plan.

When adding a guaranteed lifetime income solution to the investment lineup, plan fiduciaries should:

  • Partner with legal counsel, financial professionals, and third-party administrators to ensure that the governing documents align with enacted legislation and continue to meet the goals and objectives of the plan
  • Review the investment options and update the necessary governing documents to accommodate any features specific to the income guarantee (i.e., align in-service withdrawal age to take advantage the solution's guaranteed income payments before retirement)
  • Address the portability provisions and/or the lack of portability provisions within the terms of their plan document (although the SECURE Act allows for the portability of guaranteed lifetime income solutions, it's possible that the plan itself doesn't allow for portability of these solutions through a qualified distribution option)

Many plan fiduciaries choose to utilize an internal investment committee to make investment-related decisions. An investment committee is formed by a plan fiduciary to delegate the decision-making authority surrounding the investment strategy, goals and objectives, as well as how various funding alternatives align with this strategy. However, merely creating an investment committee won't absolve a plan fiduciary from all fiduciary responsibility.

Plan fiduciaries will continue to maintain fiduciary responsibility for:

  • Creating the committee
  • Selecting committee members
  • Continuing to perform due diligence concerning both the committee and the individual members who comprise the committee

The investment committee ensures that an investment strategy is developed at the plan level and may also undertake building the fund lineup accordingly. The investment committee can also partner with a financial professional or outsource these responsibilities altogether to an ERISA 3(38) investment manager who:

  • Has discretion over the investment of plan assets
  • Assumes liability for investment decisions
  • Remains liable for prudently selecting and monitoring investments

The investment committee needs to analyze any guaranteed lifetime income solutions to ensure that they align with the previously approved investment philosophy and strategy of the plan. It is also prudent for members of the investment committee to seek out educational information about the features, benefits and costs of these investments so they can make good decisions on behalf of the plan and its participants — especially if they are unfamiliar with the SECURE Act provisions relevant to guaranteed lifetime income solutions. Plan fiduciaries should document any decisions that are made, why they are made and what the decision-making criteria include.

Although ERISA does not require that an IPS be established for every qualified retirement plan, once it is established, it becomes part of documentation governing plan administration and should therefore be rigorously followed.

It's possible that adding a guaranteed lifetime income solution to a fund lineup will be a new offering for participants. The plan document may need to be amended to accommodate this new investment alternative, especially in light of required amendments to comply with the SECURE Act.

When considering whether to add a guaranteed lifetime income solution to an investment lineup, plan fiduciaries should review any existing investment policy statements to ensure that the new investment option aligns with the investment strategy and the selection guidelines. As a good rule of thumb, the IPS should be reviewed at least annually to assess whether the lineup continues to be appropriate for the participants, the range of diversification is suitable for participant risk tolerance, and any underperforming funds are replaced with more suitable investments.

Evaluation guide sections

Responsibility and opportunities   |   Selection and implementation   |   Oversight and monitoring   |   Portability