Post-secure 2.0 Opportunities for Defined Contribution Plans: Addressing the “Deaccumulation Challenge”
By Mark Shemtob
Retirement Section News, April 2023
SECURE 2.0 is chock-full of revisions addressing the lack of access to and savings in employer defined contribution plans. However, it included very little related to the back-end income deaccumulation challenge (i.e., balancing the spending down of post-retirement savings versus the risk of outliving assets). The Act does include a provision that would protect certain non-level payment insured annuities from violating the required minimum distribution rules. It also includes a provision designed to increase the use of qualifying longevity annuity contracts (QLACs). Neither provision is likely to have any meaningful impact on the use of these products in the deaccumulation challenge.
Background
Legislation that addresses the retiree income challenge is of value to millions and millions of Americans. Retirees that have accumulated or will have accumulated funds under their employers’ retirement plans and Individual Retirement Accounts (IRA) including IRA rollovers from prior employer plans, will need to have those funds converted to lifetime income. This can be very challenging due to the uncertainty of lifespans and future investment returns. Unfortunately, many retirees may not be in a position to access cost efficient secure retirement income solutions. Solutions can be based upon insured products, investments, or a combination of the two. The 2019 SECURE Act included a provision designed to encourage employers to add insured annuity options to plans. However, an Alight study (2023 Hot Topics in Retirement and Financial Wellbeing) concluded that to date this provision has not encouraged many employers to do so. Withdrawals from investment accounts tend to be the most popular approach used by retirees, but on their own often pose longevity and investment uncertainties. This can lead to running short of funds or underspending in retirement. QLACs can be used in conjunction with investment account withdrawals to mitigate some of the risks. However, many retirees are unaware of these products or how to access or use them. Based on a recent Invesco study (“Show Me the Income”[1]), 90 percent of plan participants preferred to have both insured and investment-based options to select from in retirement. Improving retirement security in the payout stage can be achieved in several ways. Four possibilities for consideration are noted below.
Areas for Consideration
- Further improvement to QLACs. QLACs provide guaranteed income and thus are based upon use of an underlying rate of return that represents fixed income investments. The time period between the purchase and payout date can be 15 to 20 years. Investing in an illiquid product with a low fixed rate of return for such a long period is not attractive. Allowing QLACs to be sold with an underlying variable investment between the purchase and payout dates would likely make these more attractive to many purchasers.
- Expanded plan provided retirement income options. The original SECURE Act encouraged the use of insured products through a safe harbor provision. No such provision exists for noninsured payouts. Encouraging plan sponsors to include noninsured retirement income options in addition to insured options could benefit retirees in many ways. These include access to institutional pricing, improved investment expertise, and a more seamless transition into retirement. In addition, adding some educational and modeling tools could help retirees appreciate the difference between insured and noninsured alternatives and how they might effectively be used together. Plan sponsors might be encouraged to add additional income options and related education if offered a safe harbor.
- Use of longevity pooling retiree risk sharing. Both defined benefit and defined contribution plans are currently permitted to vary benefit payouts based upon the investment performance of the plan. However, this is not the case with respect to mortality experience. The mortality experience of a large enough group is less likely to impact benefit payout levels than investment experience (especially when equity investments are used). Many innovative plan designs cannot currently be used because of this prohibition. How this current restriction can be relaxed would be worthy of consideration.
- Creation of voluntary retirement income plans. Even with a safe harbor provision, few employers’ sponsored plans will provide a variety of retirement income options and education. This is especially true of smaller plans where cost, administration and liability are of greater concern. In their current form, IRA rollovers are often not the ideal solution to the retirement income challenge. IRAs may have higher expenses, with a tendency to offer either insured or investment approaches but not both. The custodians may not be required to serve as fiduciaries with a retiree’s best interest. The creation of a new type of “infrastructure” program could be of value to many retirees. The programs would require:
- Funded exclusively by tax qualified plan and IRA rollovers,
- serve as a fiduciary subject to DOL registration and oversight,
- offer both insured and/or noninsured retirement income options,
- provide relevant education and modeling tools,
- aid retirees in consolidating funds and executing options,
- facilitate monthly payments and provide other required administration, and
- provide institutional pricing.
Summary
There is no silver bullet to improving retirement income outcomes for retirees. However, a combination of changes can be of significant value in addressing this overlooked issue. Although QLACs on the surface have potential value, they are not nearly as efficient as they could be. So far, employer plans have provided limited options for retirement income solutions. IRAs may not cost effectively serve the best interest of retirees. Employer plans should be encouraged to become retirement income providers and alternative approaches should be considered. The current prohibition on allowing plans to modify benefit payouts based on mortality experience should be reconsidered to allow for innovative plan income designs. Improvements to the deaccumulation stage of the retiree nest egg are challenging yet necessary.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Mark Shemtob, FSA, is a member of the American Academy of Actuaries, the Conference of Consulting Actuaries and the American Association of Actuaries and Pension Professionals. He is an active volunteer within the actuarial profession serving on many committees. He can be reached at markeaasa@yahoo.com.