Broadcast Retirement Network’s Jeffrey Snyder discusses the proper fiduciary steps to select and monitor a retirement income product with Kutak Rock’s John Schembari.
Jeffrey Snyder, Broadcast Retirement Network
John, it’s so great to see you again. Thanks for joining us this morning. You bet, Jeff.
Good to see you again. And before we go and talk about retirement income, how’s the weather in Omaha today? Sunny and 45 degrees.
It’s perfect. Yeah, I think a lot of us here on the East Coast and south in the United States would certainly appreciate that weather. John, I want to have a frank conversation about retirement income products.
There’s been a lot of talk in our industry about adding these to retirement plans. But before we begin the process, what has been your experience with clients and retirement income? Has this topic come up in your conversations?
John Schembari, Kutak Rock
Yeah, Jeff, this topic comes up a lot. Employers have done a really fantastic job the last 20, 30 years of encouraging employees to save, to invest, and to build up their 401k balances. But I will tell you, most employers have really dropped the ball on helping employees spend that money.
What do they do once they get this big 401k balance? What do they do with it? And employees are, you know, there’s more and more reliance on that 401k balance than there used to be.
Used to be, people would have a pension or you’d rely on social security. But now a large part of your retirement benefits is going to come from that 401k account. We’ve built it up, we’ve invested it, but now what?
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I mean, that’s a really good point. And I know employers want to do the right thing. I think it’s a complex conversation.
It’s probably very personalized to each individual person in terms of what they do or do not need. But when you look at the marketplace, John, I mean, there are a plethora of retirement income products from insurance products or products that involve insurance. There are products that involve just plain investments.
There’s drawdown funds. This is, I think, let me ask you, does this make for a greater level of complexity in terms of that process that fiduciaries are going to use to find the one that works?
John Schembari, Kutak Rock
Yeah, it really is complicated. I think everybody agrees there’s a need here. And then how do we satisfy that need is the million dollar question.
You know, on a most basic level, most employers have addressed the need by providing greater flexibility for employees to get their money out of the retirement plan. So an easy fix to do is to allow partial withdrawals from the plan. Don’t make your employee take everything out at once and then they’re on their own to figure it out.
Let them take out, you know, a certain amount every year. That’s an easy approach. But then you have all these other products as you’re referring to them with insurance companies and target date funds and the private equity we talked about before is being added to this.
It gets really, really complicated for employers to figure out what’s the right thing to do. You know, for 20 years, they’ve been told, get employees to save. And now you’re telling employers as a fiduciary, you need to help your employees spend this money.
And is that really the employer’s job or do the employer just get them to this point and then it’s up to the employee and their personal advisor to spend the money?
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I could see kind of both sides of that issue. Let’s talk about the process, though, because one of the things in your role as the attorney or the person who’s assisting the fiduciary, you try to protect them from violations of ERISA, lawsuits, all those things. So how do you go?
And this is not analogous. Reviewing these products is not analogous to reviewing a mutual fund or a collective investment trust in terms of a traditional investment. How do you set up a process?
What should you include when you look to review, you know, established due diligence and then ongoing due diligence? What does that process look like? What are some of, you know, and I’m not asking you for what the advisor should do, who’s working on the plan.
I mean, just in general, some broad brush strokes.
John Schembari, Kutak Rock
So the underlying analysis is going to be different, like you said, between a retirement lifetime income solution and a mutual fund. But the process, broadly speaking, doesn’t have to be much different. I mean, the fiduciary obligations for an employer are the same, whether they’re managing a 401k plan with mutual funds or retirement lifetime income solutions.
They have to act in the best interest of their participants, and they have to act as a prudent expert would act, and they have follow their plan documents and diversify their assets. Those fiduciary duties have been around for over 50 years. They don’t change.
How you apply those duties to retirement lifetime income is what’s a little bit different, because it’s not a traditional mutual fund type investment where your 401k investment consultant may have the expertise needed to evaluate. This is more akin to what some of the pension plan fiduciaries look at. So when pension plans decide to terminate or to liquidate part of their liabilities, they’ll look to insurance companies to buy those obligations and annuitize them.
And there’s a process. The Department of Labor has issued guidance that helps those pension fiduciaries analyze the financial solvency of an insurance company that’s providing an annuity. That analysis is going to have to apply to a certain extent in the 401k world.
We also had some guidance, Jeff, in Secure Act in 2019 that gave us a safe harbor, gave fiduciaries a safe harbor in evaluating insurance annuity lifetime income solutions. That is somewhat helpful. Again, it’s similar to what we do on the pension side, but it’s a careful review of the fees, of the investment returns expected, about the financial solvency of the carrier.
And then for me, the trickiest one is liquidity. And what do you do with this solution in your plan if all of a sudden it doesn’t look good and you need to go to a different provider? Or an employee wants to retire from the company and they don’t want this product anymore.
They want a different product. Those liquidity and transferability questions are still largely unresolved.
Jeffrey Snyder, Broadcast Retirement Network
So, John, being how, I don’t want to say sophisticated, but how different these products are, if you’re a committee, do you do a separate RFP or RFI or RFQ to evaluate products? Because it doesn’t sound like it’s analogous to what we do on the investment side. It actually sounds very different and much more specialized.
So, do you go that direction and say, okay, we want to consider retirement income products. We want to look at the marketplace. Let’s have a formal process to do that.
John Schembari, Kutak Rock
Yeah, that’s a really good question. So, I will always tell my fiduciaries that if you are not an expert, because that is a standard you’re going to be judged by. So, if you’re not an expert, then you need to get help from an expert.
And most 401k fiduciaries will do that because they’re not experts themselves. And they’ll get an investment consultant that can help them pick out mutual funds and collective investment trusts. That consultant may or may not have the expertise needed for this level of a financial product.
And so, you may need to go out and find a different expert because you’re what the constant in all of this is as a fiduciary, you will be judged as an expert. And a good defense, if you don’t have the expertise yourself, is to hire an expert. But that defense isn’t very good if you’re hiring an expert that does not have the expertise needed.
So, that might require you, even though it may be a little uncomfortable for your incumbent advisor, to go out and find another advisor that has that expertise that you can rely on.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and I’m thinking about things like who’s providing the guarantee, right? An insurance company to evaluate, you know, what is their risk-based capital that they have to keep on the books? I mean, there are a lot of, what are their credit ratings?
These are a lot of things that are similar to like a guaranteed stable value or fixed product. We’ve got about a minute left and I want to follow up with one additional question. We’re going to have to continue this conversation over time, John.
But let’s talk about that investment policy statement. So, let’s just say company XYZ for their 401k selects a product. And that investment policy typically has the factors and the asset classes, and it’s updated from time to time by you and others to make sure that it is up to date.
But does the ongoing review and due diligence of this new product that’s added to the plan, in or out of the plan, does it live there or does it have a separate investment policy or separate statement?
John Schembari, Kutak Rock
So, Jeff, I’ll give you the lawyer answer in that. It depends, but it’s, I mean, ERISA does not require an investment policy statement. So, you don’t have, nobody has to have one.
It’s a good idea to have one because it helps guide decisions that have a fiduciary nature. So, what that investment policy statement looks like will really drive the answer to your question. You could have a very general investment policy statement that doesn’t get into different products and solutions.
It just outlines a process that you follow. In that case, you may not need to amend your investment policy statement. On the other hand, the vast majority of investment policy statements go into a certain level of detail on asset classes, on types of products, types of investments, and then how to monitor and evaluate those different products and asset classes.
If you have that type of investment policy statement, I think almost, you’ll almost certainly need to amend it to accommodate some type of retirement lifetime income solution, because you’re going to need to evaluate it based on factors that are not the same as with the mutual funds or a collective investment trust. So, you’re going to need to build in that evaluation process into your IPS.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, well, I don’t think that was the lawyer answer. I think you started with the lawyer answer, but you actually gave a lot of really good information and it was non-lawyerly. Just take it from a non-lawyer.
John, we’re going to have to leave it there. Thanks so much for joining us. Excellent thought process.
I’m hooked. I’m ready to go. Look, and we look forward to having you back on the program again very soon, sir.
John Schembari, Kutak Rock
Sounds great, Jeff. Take care.