Private Sector Solutions for Legal and Regulatory Barriers to Annuities in 401(k) Plans
Over the past 30 years, the number of traditional (defined-benefit) pension plans in the private sector has declined dramatically, and the dominant form of retirement plan is now the 401(k) plan. The focus of concern has recently shifted from accumulating 401(k) plan assets to providing greater retirement income security for 401(k) plan participants and beneficiaries. In 2010 the DOL and the U.S. Department of the Treasury (the Treasury) solicited information on how they might enhance retirement security by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement (the request for information). The request for information generated considerable public comment but there were few actual developments. Part of the delay may be attributed to a certain ambivalence on the part of the DOL. On the one hand, the DOL wanted to encourage lifetime income; on the other hand, it was wary of relaxing the strict fiduciary standards of ERISA. The Setting Every Community for Retirement Enhancement (SECURE) Act, enacted in December 2019, includes major lifetime income-related provisions that will reduce some of the barriers that have discouraged the use of lifetime income products by defined-contribution plans, and hopefully will also encourage participants to think about their retirement savings as being capable of producing a lifetime income stream.
The U.S. retirement system is huge. According to the Federal Reserve Board, total financial assets of pension funds were $23.4 trillion as of March 31, 2020, of which $7.5 trillion was attributable to defined-contribution plans, including 401(k) plans but excluding individual retirement accounts (IRAs), which hold more assets than 401(k) plans. Given the uncertain state of the economy as a result of the business disruption caused by the coronavirus, and the difficulty of enacting bipartisan solutions, it will be difficult for the federal government to enact significant legislation or issue major regulatory guidance. Accordingly, this is a good time for the Alliance for Lifetime Income, other industry groups, and groups advocating for the U.S. retirement system (such as the ERISA Industry Committee, the American Benefits Council, and the American Retirement Association) to think creatively about how to develop and implement private sector solutions to improve retirement income security.