As plan sponsors across the country wander into the swirl of lifetime income options becoming available, ERISA experts remind them to stay focused on the essence of their fiduciary duties–prudence and loyalty–whenever assessing plan options and making decisions.
Impact On Participants
With a plethora of potential enhancements to retirement plans to consider, many plan sponsors are finding themselves overwhelmed by choices. Experts remind us that features like managed accounts and annuities are not required, and whenever making decisions on behalf of the plan, it is necessary to keep fiduciary essentials front and center. Specifically, plan sponsors must “be sure they understand any option before selecting it” and clarify the benefits and costs for participants:
Despite all the new products available to plans, “underneath it all, the same standards apply: prudence and loyalty,” says David Levine, a partner in the Groom Law Group, referencing the core fiduciary obligations under ERISA. The retirement world is constantly evolving, and “there are always new solutions as people try to address what people perceive as room for enhancement,” Levine says. Sponsors should evaluate the direct and indirect costs, the outcomes and the recordkeeping requirements of any option they are considering.
When it comes to fees associated with lifetime income products, sponsors should ask themselves, “in light of these fees, are the benefits to the plan and participant worth it?” There is no right or wrong answer, necessarily; a fiduciary just needs a prudent process for deciding and a “basis and rationale” for the final choice.
Given their inherent fiduciary responsibilities, plan sponsors must also continuously monitor plan performance, and that includes assessing the prudence of newly added options.
Guaranteed and NonGuaranteed Options
Plan sponsors will find it helpful to know that lifetime income products are generally divided into two categories, and its important for participants to understand the choices:
Laurie Lombardo…at Voya Financial, says…retirement income products broadly fall into guaranteed and nonguaranteed options. Guaranteed lifetime income options will essentially always be some kind of annuity or other insurance product…:“An insurance company will be on the hook for making the payments to the participant.”A guaranteed option can involve directly investing into an insurance product or later transferring plan funds into an annuity that provides a stream of income to last for the rest of the participant’s life.
A nonguaranteed option typically involves structuring withdrawals from a participant’s plan balance such that the participant continues to get a regular income, though it only lasts as long as the funds do … .According to Voya’s data, only 42% of plan sponsors offer systematic withdrawals. Given the feature’s relative simplicity, it is “probably one of the first things a plan sponsor can do toward meeting the retirement income needs of their participants.”
Good To Know
Group Law Group reminds us that a fiduciary is defined as a person who “exercises discretion over the management or administration of a plan…”, and offers these pointers about the prudent process expected of fiduciaries under the high standards of ERISA:
Although there is no one size-fits-all process for fiduciaries, it is important, as applicable to the specific situation, to gather relevant information, consider available courses of actions, consult experts when necessary or helpful,and make reasoned decisions based on all relevant facts and circumstances that they know or shouldknow.It is equally important to document this process to create evidence of ERISA compliance in the event decisions are questioned.
While acting as diligently and prudently as possible on behalf of the plan and participants, sponsors need to remember they can be held personally liable in the event of a fiduciary breach. Moreover, although ERISA bonds are required by the DOL, they do not protect plan sponsors in the event allegations are made. Colonial Surety offers a convenient and affordable package, tailored especially to help plan sponsors mitigate their risks. Armed with our Fiduciary Liability coverage, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber liability coverage is included at no extra cost, providing additional protection–for the plan and company–against regulatory actions related to data and privacy, as well as expert response services. Our packages are available for 1, 2, and 3-year terms, providing flexibility and locked-in rates:
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