By: Mitch Shames

The Employee Retirement Income Security Act was passed in 1974 to safeguard retirement income. But, for the past 30 years financial services firms have been focused largely on 401(k) Savings Plans (remember, traditional pension plans are going the way of dinosaurs). Savings vs. Retirement Income; which is it? Obviously, it needs to be both. They go hand in hand; before retirees can generate retirement income, they need to have a solid base of savings.

Given the deluge of retiring baby boomers, the entire industry (from plan sponsors to advisors, to managers and insurance providers) needs to make a quick pivot from focusing on savings alone to focusing on savings and generating retirement income. Recent surveys tell us that retirees are overwhelming calling for these new features in their retirement plans. 

While interest in lifetime income is high among plan sponsors and their advisors, there seems to be a hesitancy that is casting a shadow and a general pause over decision making and widespread adoption of these solutions. We suspect this hesitancy is related to:

1. 1. the number of new products being offered
   2. the “untested” nature of the products
   3. the insurance/guaranty element of the products

Of the three, I suspect that the third, the insurance element, is the greatest factor. For the past 40 years, plan sponsors and their advisors have largely been focused on developing analytical expertise among products that are “securities”. (i.e., equities and fixed income, mutual funds and alternative investments) For the most part, insurance products have not been part of the mix. For many reasons, insurance products were left to “roll overs” outside of the plan and therefore were left to traditional insurance advisors and outside the ambit of the retirement planning arena. 

Getting up to speed in this new domain can be daunting. Furthermore, we continue to hear that there is great uncertainty with respect to the perceived fiduciary risk in shifting to lifetime income solutions. The lack of familiarity (expertise) can generate the perception of higher risk, which can lead to inertia.

Insurance expertise, however, can’t be cultivated in a quick pivot!

I know from experience. We have done a deep dive over the past couple of years into the lifetime income products that have come to market and have developed a dynamic database, identifying over 30 products and upwards of 50 factors or features of products which need to be evaluated. Note too, each week we seem to hear about new products and expand the database. The sheer breadth of product offerings precludes the quick pivot.

Given the needs of the market, we believe that both plan sponsors and their advisors would benefit from creative thinking around structuring relationships that would help facilitate the adoption of these new products. Of course, plans and advisors can build the product competency internally. However, given the complexities and the particularity around guarantees and annuity contracts, this could take a long time; a time longer than the market might allow.

Instead, we’d suggest that advisers might partner with fiduciary experts that can demonstrate competency around the wide range of lifetime income options and the details on executing a fiduciary decision to adopt them. This model is analogous to the relationship employed between investment managers and sub-advisors.

In this model, the plan advisors would maintain the primary relationships with their clients while product experts would focus on the evaluation, selection (in a fiduciary capacity) and monitoring of retirement income options. On an ongoing basis, the plan advisors would continue to maintain their relationships with their clients while leveraging the support of the expert for providing necessary reports and responding to specific client questions. The plan sponsor ultimately could rely on the combined fiduciary processes of the advisor and the sub-advisor.

The creative use of an advisor/sub-advisor model could supplement the plan advisor’s existing skill sets and brands, while enabling them to offer a new area of expertise to their clients in a manner that enhances their on-going client relationships. This new model could provide an efficient response to plan participants pressing needs and a new dizzying array of products hitting the market.

This is one alternative. There easily could be other creative options that could arise out of collaborative brainstorming between retirement plan advisors and lifetime income product specialists. The market energy and the immediacy of meeting plan participant’s needs, provides opportunities for creative problem solving.

We welcome these opportunities.

If you would like to speak with us about lifetime income options for retirement plans, please feel free to reach out. We would love to hear from you!

By: Mitch Shames

With $39 trillion captured in U.S. retirement plans, it is not surprising that some people ask the question; “why can’t we do some ‘good’ with all that money?” In fact, that question has been asked for decades. Back in the 1960’s, driven by political protests, the Vietnam war, and the apartheid regime in South Africa, socially responsible investing gained currency. Eventually, in 2004, socially responsible investing morphed into Environment Social and Governance (ESG) when Koffi Annan introduced a set of principles to the CEO’s of 50 major financial institutions.

Today, ESG has been reduced to a political hot potato. Starting with the Obama presidency, the Department of Labor has introduced proposed regulations either supporting or prohibiting plan fiduciaries from taking ESG considerations into account when investing plan assets. True to form, the Biden administration filed supportive regulations which were eventually challenged and overturned by a court.  

Given that litigation around these regulations continues to play out, fiduciaries would be well advised that any reliance on these regulations might be risky at best.

However, all is not lost. Commentary and research is showing that many of the issues highlighted by ESG are not merely a matter of “social do-goodism” but rather can go to the issue of evaluating the quality and reliability of a corporation’s current and projected earnings.  In other words, focusing on various ESG issues are tantamount to focusing on real business issues and their impact on earnings. Certainly, even the most skeptical about ESG would likely admit that the evaluation of earnings is a critical component of any active investment management strategy and worthy of evaluation by a plan fiduciary.  

As an example, just recently the Wall Street Journal reported that the Federal Reserve Bank has launched a Pilot Program evaluating whether the largest banks face risks related to climate change. In other words, charged with monitoring the resilience of the banking system, the Federal Reserve, has determined that climate change may raise specific systemic risks and that it is worthwhile to assess these potential risks.  

The approach by the Fed seems not to be an extreme position. In fact, it appears prudent and reasonable. As any knowledgeable fiduciary knows, prudence and reasonableness, are the watchwords of the fiduciary decision-making process.

Therefore, it would seem that the best possible approach for fiduciaries would be to avoid the extremes of the political positions and instead focus on a middle of the road reasonable approach. Remember, plan fiduciaries are charged with the responsibility of investing plan assets “solely in the interest of plan participants”. When it comes to ESG, explore with asset managers and advisors how they might evaluate the risks and earnings impact associated with various ESG issues as business matters (impact on earnings), not as matters of social activism. Seems there is little fiduciary risk attributable to focusing on the potential risks and returns related to plan investments.

If you would like to speak with us about your ESG concerns, please feel free to reach out. We would love to hear from you!