By Randy Myers
The SECURE Act of 2019 cemented what had already been a growing trend in the world of retirement plans: a focus on viewing them not just as a way for workers to save for retirement but also as a way to provide them lifetime income in retirement. That shift may open new opportunities for the stable value industry.
The challenge, presenters at the 2020 SVIA Fall Forum noted, will be to make sure the stable value community makes itself a part of the conversation as the retirement industry explores new ways to address retirees’ lifetime income needs. Doug McIntosh, vice president, investment products, at Prudential Financial, said much of the opportunity may center around pooled employer plans, or PEPs, and multiple employer plans, or MEPs, both of which are expected to become more popular under provisions of the SECURE Act.
Introduced under the SECURE Act, PEPs are 401(k) retirement savings plans operated on behalf of wholly unrelated employers using the same recordkeeper or third-party provider. MEPs allow for businesses in the same trade or industry—electrical contractors, for example—to similarly participate in a shared plan. In both cases, the expectation is that the companies brought together will benefit from economies of scale, including the use of their collective purchasing power to negotiate better fees and services. MEPs existed prior to the SECURE Act but are now easier to create.
In addition to facilitating the creation of PEPs and MEPs, the SECURE Act, among other things, removed age limits on retirement contributions, raised the required minimum distribution age to 72 from 70½, relaxed rules on offering annuities in retirement plans, and required that retirement plans give plan participants an annual estimate of how much income their account balance would provide if used to purchase an annuity.
Elizabeth Heffernan, investment strategies consultant for Fidelity Investments, said that in the wake of this legislation growing numbers of plan sponsors are considering whether they should allow plan participants to remain in their plans even after they have retired. Accordingly, they’re also taking a closer look at what kinds of investments they should be making available to plan participants.
“We’ve already had a few looking at their investment lineup and saying, ‘Maybe I not only need to have mechanisms for people to draw down (their accounts) that are more flexible and compatible with staying in their plan, but perhaps I need more investment options that are geared toward that retiree population,’” Heffernan said. She added that some plans, if they don’t already do it, also are considering whether they should provide a way for employees to take automatic, periodic withdrawals from their accounts once they retire.
With the new focus on retirement income, McIntosh predicted that the retirement industry will continue to see innovation in the stable value arena around decumulation solutions, along with additional creative thinking by large financial institutions about ways to explicitly deliver lifelong income or provide a pathway to it.
McIntosh reminded the SVIA audience that despite the new focus on lifetime income, the stable value industry must also be sure to continue pursuing a role in asset accumulation products for retirement plan participants, including custom target-date funds, custom collective trusts and managed accounts. “We believe that in all those arenas, subject to appropriate logistical considerations, there is a role to be played by stable value,” he said.
McIntosh and Heffernan agreed that MEPs and PEPs will most likely be embraced first by employers who currently aren’t operating retirement plans, and only draw in existing plan sponsors if they see the potential to realize material cost savings or other gains. In a flash poll of the SVIA audience during the presentation by McIntosh and Heffernan, 54% of the respondents said they were already engaged in work to include stable value products in MEPs.
“It’s important to understand who the players are and who’s coming to the table with these programs, and how we as an industry engage in the dialogue,” Heffernan concluded. “Once the table is set and things are going, it’s often hard to make a change. That’s not to say a lot of MEPs might not start out with a very simple investment lineup. But as they grow, it will be important to make sure the voice of the stable value industry is at the table and being heard, and that it’s understood how stable value might be integrated into these plans as they become more prevalent.”