SECURE, Ben Franklin and Looking For a Few “Good” Plan Sponsors
You may have noticed that the SECURE Act has stalled in the Senate.1 One much-discussed provision would change fiduciary requirements for adding an in-plan annuity.2
I am a Frank-o-phile - a big-time fan of Ben Franklin. My sister Carol lives in Philadelphia (sisterly love).3 She once took me to Ben’s 300th birthday celebration at the National Constitution Center.4 And, one of Carol’s Christmas gifts to me is a favorite – a Ben Franklin action figure - push the right spot on his chest and you get one of over 100 famous quotes.
So, what does SECURE have to do with Ben Franklin? In-plan annuities remind me of a frequently misused Ben Franklin quote, “Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.” Ben was defending the authority of the Pennsylvania legislature to tax its citizens and to govern in the interests of collective security, in response to frontier challenges that were part of the French and Indian War.5
Today, I’m substituting flexibility for liberty and security for safety when I paraphrase Ben, “Plan sponsors who add an in-plan annuity to a 401(k) or 403(b) plan subject to ERISA are introducing a default payout structure that is unnecessary, an option that reduces retirement security because an in-plan annuity is suboptimal for the majority of participants.”6 You can quote me.
Yes. During thirty plus years in plan sponsor roles over five different decades, I encountered very few participants who expressed an interest in using plan assets to purchase an annuity. So, no surprise that only a handful of plan sponsors have added in-plan annuity options; just slightly more have selected a vendor for individual annuity purchases. Instead, most plan sponsors have avoided offering in-plan annuities, or, like me, have taken action to remove in-plan annuity options back in the early 1980’s to reduce compliance burdens.7 Most plan sponsors direct interested parties to the individual market. Finally, because demand remains weak, most plan sponsors continue to avoid annuities.8
Reduce retirement security?
Yes. Most American households are (and will be) highly annuitized.9 Most older Americans already hold most of their wealth in an annuity-equivalent form: future Social Security, DB plan benefits, and owner-occupied housing. So, most near-retiree US households are already highly annuitized.10 Adding in-plan annuity will add new costs, new administrative requirements and additional compliance complexity for an option most don’t need.
Suboptimal? Yes. An in-plan annuity must use unisex mortality factors. Often, male participants can obtain an annuity with greater income from the individual marketplace. For married workers, compliance requires a default in the form of a 50% contingent annuity (unless the spouse consents to a different form of payout) – as if that payout option is optimal for all individuals who are married when they commence payout.
So, Is There A Better Alternative?
Most recently, the Society of Actuaries posted a related study that concludes the optimal retirement income solution for most middle-income workers is something they call the Spend Safely in Retirement Strategy (SSiRS), a combination of:
- Optimizing Social Security benefits by delaying commencement until age 70 to maximize the amount of guaranteed, indexed, lifetime income;
- Generating retirement income from savings to gap-fill income needs up to age 70, then beyond by using the IRS required minimum distribution (RMD) rules; and
- Investing using a low-cost index fund, target-date fund, or balanced fund.11
I’m convinced. The best implementation alternative might be to add SSiRS functionality as the default payout option – to force workers who prefer cash or an annuity to make an affirmative election. Today, the “default” payout option is a lump sum at age 65 or the required beginning date. In many plans, the “default” payout option uses annual installment payments that comply with required minimum distribution rules. For the latter group, deploying the SSiRS functionality simply requires the annual installment payment process to commence at the time payments start and to include an additional income amount equal to the amount of Social Security benefit commencing at age 70.
I am still looking for a few “good” plan sponsors who would like to experiment in this space. Send me a note: [email protected]
1B. Anderson, SECURE Act Stall: 2 Reasons it’s Still Stuck in the Senate, 8/27/19, Accessed 9/2/19 at: https://401kspecialistmag.com/secure-act-stall-2-reasons-its-still-stuck...
2A. Schrager, It’s time to get over how much we hate annuities, Quartz, E&Y, Senior Moment, 6/3/19, Accessed 9/2/19 at: https://qz.com/1630269/the-secure-act-will-encourage-retirees-to-open-an...
3Behind the Name.com, “From the name of a city in Asia Minor mentioned in Revelation in the New Testament. The name of the city meant "brotherly love" from Greek φιλεω (phileo) "to love" and αδελφος (adelphos) "brother". It is also the name of a city in the United States.” Accessed 9/2/19 at: https://www.behindthename.com/name/philadelphia
4Ben Franklin 300 Philadelphia, a year-long commemoration of Benjamin Franklin’s 300th birthday in Philadelphia including the premier of the international traveling exhibition, Benjamin Franklin: In Search of a Better World at the National Constitution Center. Benjamin Franklin was born January 17, 1706 in Boston and died at the age of 84 on April 17, 1790 in Philadelphia. For comparison, Wolfgang Amadeus Mozart was born 27 January 1756 in Salzburg, Austria and died 5 December 1791 in Vienna, Austria. I often wonder if Ben ever met Mozart in his travels to Europe. Accessed 9/2/19 at: http://www.benfranklin300.org/bf300.htm
5NPR, Ben Franklin's Famous 'Liberty, Safety' Quote Lost Its Context In 21st Century, All Things Considered, 3/2/15, Accessed 9/2/19 at: https://www.npr.org/2015/03/02/390245038/ben-franklins-famous-liberty-sa...
6J. Towarnicky, 2018 ERISA Advisory Council, Lifetime Income Solutions as a qualified Default Investment Alternative (QDIA), Focus on Decumulation and Rollovers, 6/19/18, Accessed 9/2/19 at: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/about-us/erisa-a... See also: J. Towarnicky, Looking For A Few “Good” Plan Sponsors, 11/28/17, Accessed 9/2/19 at: https://www.psca.org/blog_jack_2017_16 See also: Annuitization Anyone?, 5/2/19, Accessed 9/2/19 at: https://www.psca.org/blog_jack_2019_28
7Retirement Equity Act of 1984, Pub. L. 98-397, 8/23/84.
8J.Towarnicky, Note vi, Supra.
9S. Holden, S. Salinas, 2018 ERISA Advisory Council, Lifetime Income Solutions as a Qualified Default Investment Alternative (QDIA), 8/20/18. “… Estimates show that, for those in the lowest quintile of workers ranked by lifetime household earnings, first-year Social Security benefits are scheduled to replace 96% of inflation-indexed lifetime earnings, on average, for workers born in the 1960’s who claim benefits at age 67 (Social Security Normal Retirement Age).” Accessed 9/2/19 at: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/about-us/erisa-a...
10Ibid. Data represent households with at least one member aged 57 to 62 and exclude the highest and lowest 1% of households ranked by comprehensive wealth. Comprehensive wealth includes the present value of future Social Security benefits and the present value of future DB benefits, in addition to financial assets, net housing wealth and other balance sheet items.
11W. Pfau, J. Tomlinson, S. Vernon, Viability of the Spend Safely in Retirement Strategy, July 2019.