Plan sponsors’ unease with including retirement-income products in 401(k) plans could diminish, if Putnam Investments President and CEO Robert Reynolds gets his way. Reynolds wants the federal government to create a Lifetime Income Security Agency that would function like a Federal Deposit Insurance Corp. (FDIC) for annuities and annuity-type investments, guaranteeing the principal for people who buy them.
Making this idea reality would require creating a national insurance charter; currently, state insurance regulators play the main oversight role. “Right now the insurance industry has 50 regulators,” Reynolds says. “We need a national charter and one set of rules. That makes it much easier administratively.”
National insurers could choose to participate in the national system or not, Reynolds says, so state regulation could still come into play. The new agency would approve or disapprove the retirement-income products that get a guarantee. “What we do not want to do is have a race that has been somewhat prevalent in the industry: Who can come up with the most bells and whistles on annuities?” he says. Complexity often gets cited as one of the reasons why many 401(k) participants have not bought annuities, and he adds “since 2002, through two major downturns, annuity sales are flat to down.” He also attributes the hesitancy in part to the current “single-company risk” of investing in a retirement-income product. With a Lifetime Income Security Agency, he says, “When people put their money in, they would be assured that the principal will always be there.”
The insurance industry itself would pay for this system, similar to the FDIC, and the federal budget would not fund it, Reynolds says. That would mean adding a fee to these investments to cover the guarantee; he says he cannot estimate the fee at this stage.
This setup likely would appeal to many plan sponsors, most of who have balked at including retirement-income products as an option within defined contribution plans. “From a plan perspective, I would be hard-pressed to find any problems with it,” says Edward Ferrigno, vice president, Washington affairs at the Profit Sharing/401(k) Council of America. “A major concern with plan sponsors is that they have to reach a comfort level as a fiduciary about the ability of the insurer to provide the benefit down the road. A guarantee would be helpful.”
But even Reynolds cautions that this idea “is not the holy grail of retirement income.” Another thing that would help ease fiduciary worries: a safe harbor for employers selecting an in-plan retirement-income product, such as the Qualified Default Investment Alternative (QDIA) created for default investments in automatic-enrollment programs. “Anytime you can provide a safe harbor, you strongly enhance the product offering,” Reynolds says.
Congress would have to pass legislation to create this new agency, and Reynolds declines to say if anyone in Congress is prepared to sponsor a bill on it. If someone does, he thinks it has “a shot” in the next year or two. “It is an issue of, what is on the agenda? So much of what gets passed is, what are the priorities at the time? Right now, the budget and the deficit are on peoples’ minds,” he says. “Once we get past the budget debate, I think that retirement-security issues will come to the forefront. And this is the first year that Baby Boomers will turn 65, so this whole issue is going to be with us for years to come.”
Ferrigno sees the insurance industry’s stance as the key driver of legislation. “The question is, will the industry support this? Because it (the new agency) could have the authority to approve or disapprove products,” he says. “Step one for viability is the industry consensus.”
That could prove challenging. “Mr. Reynolds is right to be focusing on the important role annuities can play in boosting Americans’ retirement security,” says Jack Dolan, spokesperson for the American Council of Life Insurers (ACLI). “But we do have to point out that annuities are already well regulated by the states, with strong solvency oversight and consumer protections in place.”
Reynolds says he has talked to many people in the insurance industry who support the idea. In terms of publicly taking a stand, he says, “The challenge that the insurance industry faces is that if they come out for this, they create a possible backlash from state insurance regulators.”
