The Labor-Treasury Agenda: Improving Defined Contribution Plans

By Randy Myers

The federal government wants defined contribution plans to work more effectively for their participants.

Retirement savings plans are looking healthier than they did just a short while ago, but total plan assets slipped to $2.7 trillion in 2008 from $3.8 trillion in 2007. They have rebounded to $3.5 trillion by the first quarter of 2010. “There does appear to be some room for improvement,” says Michael Davis, deputy assistant secretary of the Department of Labor’s (DOL) Employee Benefits Security Administration.

After all, Davis said at the 2010 SVIA Fall Forum, the Employee Benefit Research Institute’s 2010 survey on retirement confidence found that only about 16 percent of workers were very confident they will have enough money to retire. And many reported that neither they nor their spouse had saved anything at all for retirement.

One response from the Obama administration has been a proposal to create “automatic” Individual Retirement Accounts in which American workers would be enrolled automatically if they don’t have access to an employer-sponsored retirement plan. “This is a legislative proposal the administration put forward several months ago, and it’s still there,” Davis said. “With the new Congress, we’ll see what happens.”

Meanwhile, the Department of Labor, along with the Department of the Treasury, are looking to do more. Their new “lifetime-income initiative” aims to help Americans convert their retirement savings to a lifetime stream of income once they stop working. The program began with a February 2010 request for information from the financial services industry, in which the two departments invited comment on the types of products available for generating retirement income, the impediments to offering them, and the reasons so few people take advantage of them. They also held a hearing on the topic, attracting about 25 witnesses.

“Our thought is to see whether there is a constructive role for government here,” said Mark Iwry, senior advisor and deputy assistant secretary for retirement and health policy for the U.S. Department of the Treasury, who also spoke at the SVIA’s Fall Forum. “This isn’t about mandating anything, or pushing it onto people. It’s about facilitating your efforts, and the efforts of others, to create retirement-income options that are more attractive, and that people are likely to consider realistic alternatives.”

As a result of the joint inquiry, Davis said, these departments are looking at a number of options:

  • They are considering whether it needs to expand Interpretive Bulletin 96-1. Issued in 1996, the bulletin spells out how plan sponsors can offer investment education to retirement-plan participants without triggering the fiduciary liability that goes along with offering investment advice. Many in the retirement industry are now calling for the bulletin to be expanded to cover the distribution phase of retirement planning as well.
  • They are also looking at ways to remove what some plan sponsors see as obstacles to incorporating annuities into defined contribution plans. For example, they are reconsidering whether they have created a satisfactory “safe harbor” to shield plan sponsors from liability if and when they select a company to offer annuities to their plan participants. While the DOL has already stated that fiduciaries do not have to choose the “safest” annuity available, some sponsors are not convinced this affords them sufficient protection.
  • Finally, they are trying to decide whether it would make sense to require benefit statements to disclose the value of participant accounts not only as a lump sum but also what that sum could generate in the form of a monthly income stream.

“People are used to having 401(k)s framed as an account balance,” Iwry said about the DOL’s efforts. “If they think of it as an account balance that has an annuity equivalent, maybe they will get more used to the idea that the purpose of their savings can be to provide a pension paycheck once they retire.

Overall, Irwy added, the lifetime-income initiative is trying to encourage 401(k)s to be more like pension plans. “We want to see if it’s possible, using behavioral techniques or strategies, to encourage people to at least give serious consideration to saving more, to investing in a way that’s appropriate for them, and managing their funds in retirement in ways that will help them deal with longevity risk, as well as the additional risks, financial and otherwise, people confront as they retire,” he said.

Responding to a question from the audience, Davis noted that the DOL is not focused only on annuities as a solution to the retirement income needs of the American people. “We call this our lifetime-income project, not an annuity-based project,” he said. “We used that specific language because we don’t believe annuities are necessarily the only product that can be used.”