Chris Carosa’s recent article “Should A 401k Plan Sponsor Take On The Additional Fiduciary Liability Associated With Retirees?” addresses an important question – whether 401(k) plan fiduciaries should encourage participants to leave their account balances in the plan through retirement. His answer? A sensible “what’s right for one company may not be right for another company.”
Deciding whether to encourage participants to leave account balances in the plan through retirement should not be based solely on considerations like accumulation of assets in the plan, the offsetting of administrative fees, and the ability to offer very low-cost funds. Using only these factors may lead to unexpectedly difficult questions with no clear answers. Thus, when contemplating whether to encourage participants to leave account balances in the plan, consider the following questions.
Should fiduciaries offer services and/or products to help retirees manage the finances and spend-down of assets (“decumulation”)?
Just as there is no affirmative legal obligation to provide advice on saving for retirement, there is no affirmative legal obligation to provide resources to assist retirees in managing decumulation. That said, most plans focus entirely on asset accumulation, both by design (e.g., auto-enrollment) and through the composition of the investment line-up – and the needs of a retiree are different from those of an active employee.
So, if fiduciaries encourage participants to leave their account balances in the plan and growing numbers do, it would seem prudent to consider adding some type of retirement income solution (“Solution”) to the plan. Deciding to do so, however, raises even more questions:
- WHO decides whether to add a Solution? If the fiduciaries decide, they can be held liable under ERISA for losses caused by their decision. This risk can be mitigated through use of expert advisors and a thorough review process, but, ultimately, the fiduciaries would be on the hook. On the other hand, the plan sponsor could insert provisions requiring the fiduciaries to include a Solution, i.e., “hard-wire” it into the plan. While this mitigates risk from the decision whether or not to offer a Solution, hard-wiring forces the fiduciaries to grapple with the very difficult issue of what Solution to offer and how to monitor it over time.
- HOW do they decide whether to add a Solution? Should they make use of an online survey? If so, who participates? Everyone? Or just retirees? Surveys are unreliable, may plant ideas, and create expectations. Should they simply evaluate the investment allocation and withdrawal pattern of retirement-aged participants? This approach would not take into account other sources of income and/or other assets and could also be very misleading.
Assuming the decision is made to add a Solution to the plan, what Solution should be added?
Given the wide spectrum of Solutions, choosing the right one is yet another very difficult issue. Some factors to consider include:
- Determining the amount of responsibility retirees should have. The spectrum of potential answers to this question runs from adding installment payments (maximum retiree responsibility) to adding annuities or funds that provide guaranteed lifetime retirement income (responsibility largely shifted to insurance company).
- Deciding between advisory services or a guaranteed income product. Advisory services such as decumulation-oriented managed accounts may be more individually tailored, but there is no insurance-backed guaranteed income. Annuities and guaranteed lifetime income funds can be very complex and the features and costs may not be well understood.
- Evaluating guaranteed income products. If the decision is to offer a guaranteed lifetime income product, there are numerous additional factors to consider, including (but certainly no limited to): whether the product has to be used during a participant’s accumulation phase or can be used at retirement, the amount of income provided, the presence or absence of a lifetime guarantee, the insurance company’s financial strength and experience, potential post-retirement increases and/or decreases, access to savings once the retirement income stream has started, and the degree (if any) of control over how the assets are invested
As should be apparent from this brief discussion, and as Chris concluded in his article, there is no one-size-fits-all solution. It is important to consult your counsel when determining the best course of action for your particular circumstances and goals.
Elliot Raff is a seasoned attorney with experience in government, law firm, and as the sole in-house legal support to compensation and benefits at Fortune 500 companies (Sears Holdings Corporation and Bristol-Myers Squibb Company). He regularly advises HR and Finance teams, business owners, C-suite executives, fiduciaries, and plan service providers across all types of employee benefits and executive compensation matters, including plan design and implementation, plan governance and fiduciary duties, service provider contracting and management, operational compliance and issue resolution, IRS, DOL, and PBGC examinations, transaction support, and post-closing integration.