In this episode of Broadcast Retirement Network, we bring together leading voices on retirement income strategy and fiduciary considerations. Guests include John Schembari, Kutak Rock, Ed McIlveen, CFA, Francis, LLC, and Robert Scherzer, AIF of World Investment Advisors. We discuss what employers and fiduciaries should weigh when introducing (or evaluating) guaranteed lifetime income features within defined contribution plans—balancing participant needs, plan design, and real-world implementation realities.
Jeffrey Snyder, Broadcast Retirement Network
Well, joining me now, Bob Scherzer is the Managing Director for World Investment Advisors. Ed McElveen is a CFA Charterholder, Chief Investment Officer for Francis LLC, and John Chimbare is an ERISA Attorney and Practice Leader for the law firm Kutak Rock.
Gentlemen, it’s great to see you. Good to see you. Good to be here.
It’s great to have you. We’re talking about retirement income this morning. John, I want to start with you, and I’m going to go around.
We’re going to do a round robin, even though we’re not in a circle, but I want to go from person to person. John, I want to start with you because I think you bring an interesting perspective as an ERISA attorney. Let’s talk about client interest in retirement income.
What are clients telling you about retirement income?
John Schembari, Kutak Rock
Yeah, I think clients are very interested in this, at least what I’m seeing, Jeff. Over the years, clients have done a fantastic job of helping employees accumulate retirement savings, but really done a really poor job about helping employees figure out how to spend that. And so they are hearing from their employees saying, we don’t know what to do.
We don’t know how to spend this money. And I think employers are looking for solutions.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, Ed, I mean, people are looking for solutions. It’s clearly the appetite is out there. What’s your perspective?
What are you hearing from clients as a chief investment officer for Francis LLC?
Edward McIlveen, CFA, Francis, LLC
Yeah, a couple of things. When it comes to just understanding the complexity of all right, everybody wants to have some kind of guaranteed retirement income for life. It all sounds wonderful, but it becomes very problematic in terms of the execution of this.
So in terms of the conversations, yes, they are frequent. These are the things that are often talked about and sought after by participants. But what it comes down to is really what’s scalable, what’s gonna be liquid, and what’s really gonna meet the participant needs.
And one of the things that we have found too, is that in addition to just considering the concept, it really is dictated in many ways in the demand by the interest rate environment. And with the 10-year treasury now starting to creep back up to almost 5%, people like the idea of this guaranteed retirement income, but then when they go and start pinging databases and looking, doing some shopping, then like, I’m not so sure I like that idea right now. I’ll keep it on the stock market where, hey, my portfolio is up over 20% in the last 12 months.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, Bob, there’s a lot that goes into that. We’re gonna talk about it in a minute, but are there certain plan types, whether it’s 401k, 403b, 457b, defined benefit, are there certain plan types that where retirement income is resonating more than not?
Robert Scherzer, AIF, World Investment Advisors
I think so. I mean, I think the time is right now, everybody’s talking about it, but I do think as a persona, not-for-profits 403b seem a little bit ahead of the curve. Maybe it’s based on some of the pay scales and they’ve been at it a little bit longer, but I agree with that.
A lot of it is just the complexity, right? So to me, the key to getting this executed and where people have had the most success is somehow doing it within the QDIA of the plan, the Qualified Default Investment Alternative, to kind of somehow be able to embed it, but also give some optionality, but keeping it simple is really what’s very important.
Jeffrey Snyder, Broadcast Retirement Network
And just to follow up on that real quick, Bob, I mean, are clients looking for, you mentioned the QDIA, which would be part of like a target day fund or managed account, whatever solution. What about in-plan or out-of-plan? Does that ever come up?
Because I would imagine, and we’re gonna talk to John about this in a few minutes, but I would imagine that the concern about being responsible for assets, is that better in the plan or out of the plan? Is there anything that resonates there?
Robert Scherzer, AIF, World Investment Advisors
I think so. I mean, I think the only way to get any reasonable type of adoption is to do it in-plan, not that out-of-plan is a bad thing. But then I would probably defer to John from an ERISA perspective or have you, how you kind of govern that and how you kind of make sure it’s suitable, et cetera.
But income has been talked about for a real long period of time. Obviously, unless you’re in a government or a policeman or woman or fireman, DB plans are just not out there anymore. So I think people are now really interested in figuring out the right solution.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, John, Bob’s absolutely right. I had hair when they started talking about retirement income and we’ve had money purchase plans that have had default annuity components to the plan. But what’s the regulatory or legal framework around it today?
And do the new DOL investment selection rules alter any of that?
John Schembari, Kutak Rock
Yeah, yeah, it’s interesting. Clients are very interested in it. Employees are asking for it.
But when we get into the weeds of doing it and the risks involved, clients are putting their hands up. So I agree that offering something in the plan makes an awful lot of sense. I think fiduciaries and employers are better equipped to make important decisions like this than employees themselves.
But the risks of doing that are honestly causing employers not to take action and to tell employees, go do it outside of the plan. You want a guaranteed income solution, take a distribution, put it in an IRA and you figure it out. Go ahead, Jeff.
Jeffrey Snyder, Broadcast Retirement Network
Well, I was gonna follow up on that. Does all this discussion about social security change the complexion of those conversations? Because it used to be, you know, social security was there, your personal savings and your qualified plan, right?
And now that we’re talking about the social security but they’re talking about social security trust fund being depleted, does that create more of an impetus for those employers that had their hand up to say, hey, we gotta do something?
John Schembari, Kutak Rock
Yeah, no, I think so. But again, employers for the last 40 years have just been focused on getting employees to save. And they’ve done a great job.
I mean, they’ve done a fantastic job of getting employees to save. And now employees have saved, they wanna retire and they don’t know what to do. And it’s impossible to convince a 20 year old that a defined benefit guaranteed income solution is a good move.
But when everybody, when they get to be 60 or 65, they’re loving the idea of some type of guaranteed income solution. So with the Secure Act came out, Jeff, you know, they made it, they gave us a safe harbor for fiduciaries to go out and hire retirement income insurance solutions. That didn’t move the needle much because the market hasn’t evolved to a point where there are attractive options.
Now we have this year, the new Department of Labor guidance on selecting investments. One of the factors that fiduciaries have to look at is complexity. And one of the problems or drawbacks of these types of investments right now, they are kind of complex.
There’s a lot of liquidity concerns, transferability concerns, financial viability concerns that are not present with a traditional 401k investment.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I mean, Ed, John’s absolutely right. Let me ask you, before you kind of comment on that, let me ask you about in plan or out of plan because the Federal Thrift Plan, which is by far the largest DC plan in the world, they have an annuity window. I don’t think, I think very few people go outside the plan and utilize an annuity.
It could also be that they have the defined benefit plan because it is kind of a hybrid, but in plan or out of plan, what are you hearing from clients?
Edward McIlveen, CFA, Francis, LLC
Well, you know, when it comes to the out of plan solution, there’s things like the Hewler Income Solution that is a pretty good network of insurance companies that you can go ping and get some ideas. We’ve had a number of clients that have taken a look at that. A few of them have opened up the portal, but utilization is very, very low.
Part of it is just from the reality of the complexity that’s associated with it. And then you get to the in plan solution, which does sound a little bit more viable because you have a little bit more control over this. But here then some other questions start getting raised at the committee level and that is, all right, well, what’s in the best interest of everyone?
And so if there are certain products and there are that do charge a fee for everybody to be involved in that particular platform, that may not be the right answer. There’s others that are, I think, a little bit more flexible in particular, something like a BlackRock Lifetime Paycheck Solution that is, all right, you’re moving along in the target retirement date world. And then at some point, when you want to at a certain age, you start buying the income credits.
And so when you start buying the income credits, that’s a fee that you’re gonna bear, not everybody else in the plan. But when it comes to try to explain all this to the committees, as well as to the participants, this is where things start to get a little bit unglued. And in fact, it’s gotten to the point when we sit down and speak with folks, not to steer this too far in a different direction, but really, what is the insurance company trying to do?
They are trying to crack the nut to make everybody feel good about lifetime income. And is there another route to take? Well, believe it or not, we believe that, and this isn’t something that, if somebody wants an annuity, we can certainly help guide them, engage them to the right places for it.
But if you want it, you could just hold a balanced portfolio, schedule a four or 5% withdrawal over time, and voila, at the end of all that, you’re not gonna have all your money get taken away by the insurance company. You’re gonna have a pretty good income stream, and this is a time-tested result. This is basically running your own personal portfolio like an insurance company would.
You’re just gonna have to accept a little bit more of the market volatility. So to think about in-plan and out-of-plan, and then, hey, what’s the other alternative that’s more simple than anything else? We try to put it all on the table for people and think about it from a due diligence standpoint.
Jeffrey Snyder, Broadcast Retirement Network
Well, Bob, I know you work with a lot of committees. Thanks, Ed, by the way. Bob, I know you work with a lot of committees, and committees, they want information.
They’re not experts. They hire you to be the expert, or they hire Ed or they hire someone else to be the expert. So how do you coach them through this?
Because arguably, every product is going to be different. It’s gonna be unique. So how do you, it could take months.
It could take years to make a decision.
Robert Scherzer, AIF, World Investment Advisors
Yeah, I mean, the devil’s in the details, right? I mean, you look at one product, you look at one product. We do a lot of business in the not-for-profit space, and it’s no secret.
One of the leaders there is TIA, right? And they have some solutions, and we like some of their solutions better than others. And for some clients, they’re appropriate, but for others, they’re not, right?
So it really depends on, we like products that have a right, but not necessarily an obligation to annuitize. We’re not putting everybody in a bucket. We like products where there’s not, as Ed’s pointing out, an inherent drag on the performance by selecting it, where you can kind of build out this optionality at the participant level to annuitize or not.
So, but the market is changing so rapidly. There’s so many quote-unquote new players into the market. There’s products that I’m hearing are gonna be launched in the next six to 12 months, and they’re just waiting for regulatory approval or state insurance approval, et cetera.
So in the end, I don’t think it’s any different than any other area that Ed or John or myself will advise a client. What are we trying to accomplish? Let’s figure out what the benefits and detriments are, and then let’s see what the solution is.
The good news is there’s far more product out there now than there was a few years ago, so it does provide that optionality.
Jeffrey Snyder, Broadcast Retirement Network
And I would imagine, Bob, some clients are more paternalistic, meaning they’re gonna think about, what does my participant, and think about the average participant in the plan, and how do I educate, communicate this to them? So it’s not just that decision, which the 15 or 20 people around the table, depending on the size of the committee, have to make. It’s through that lens that they’re looking.
That could also slow up the process or complicate things.
Robert Scherzer, AIF, World Investment Advisors
Yeah, as I said, I mean, look, the whole world in defined contribution has been accumulation, accumulation, accumulation, getting people to this big balance, and now you gotta talk about with the baby boomers, and the decumulation, and now you’re gonna have a lot of plans that have more money leaving than actually are going into it. So it’s just a very important, thoughtful discussion. It might be one of the more important things that happened, but as John says, or Ed, sometimes it’s just like, you know what, do it on your own.
I mean, there’s nothing wrong with an employer taking that approach, or another employer saying, let me try to find something that we think is high quality, institutionally priced, that’s gonna be a benefit, but that’s when they’ll have to talk to somebody like, with John, just to make sure they’re doing all their due diligence.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, John, let me ask you about, and I wanna come back to Ed about the actual due diligence in a second, and what the process could look like, at least for him and his clients, or his firm and their clients. But John, a lot of us, I don’t know, you know, you read the trade pubs like I do, and you do, and everyone on the call does. You know, there’s talks about, you know, we have the Pension Protection Act, which created auto enrollment, auto escalation.
Do we get to a place where we have an auto default to a QEIA that includes this type of product?
John Schembari, Kutak Rock
I don’t know if we’re gonna get there. I mean, honestly, I have a little bit more confidence in the private sector coming up with solutions than the government. And so, and I don’t know how the government picks, you know, what is an acceptable auto default solution.
I don’t see that, and right now, from the government’s perspective, I don’t think they view the retirement income issue as a problem. Again, they’re focused on the accumulation, and one of their focuses is, how do we solve the social security crisis? Well, let’s get private employers to help their employees save.
So that’s what their focus. I don’t think there’s too focused on the spend right now. I don’t think that’s gonna become a mandated default option.
Jeffrey Snyder, Broadcast Retirement Network
Good point. Ed, I wanna come to you, and then I’ll go to Bob and we’ll close things out, because we could talk for hours. I don’t wanna bring you back.
I’m gonna call you guys the power panel. Now come, and maybe, you know, we’ll do something a lot more frequently. We can hit all the major issues of the day in D.C. and retirement. But let me ask you, Ed, about due diligence, because Bob talked about it. You know, more products coming online. That only creates, you gotta have a dedicated retirement income professional or professionals in your practice.
Edward McIlveen, CFA, Francis, LLC
Yep, and there’s so many things that come along with the due diligence process. One of the things that insurance companies are very good at doing is producing a lot of disclaimers and information to pour through.
Jeffrey Snyder, Broadcast Retirement Network
We know that.
Edward McIlveen, CFA, Francis, LLC
And so my favorite disclaimer is the one that says, hey, here’s a disclaimer, and then here’s another one. It’s available upon request. And so these kinds of things just are the reality that we have to live in.
So you have the broad theme of, all right, what is this product trying to do? And as these have been coming to us for many, many years, we have just pushed back again and again and said, okay, like the idea conceptually, but these are the problems. It’s not portable.
It’s not liquid. What about this? What about that scenario?
And you start bringing all these scenarios to them. And the industry has started to change to be more flexible around that. I think that’s something that was really building up quite a bit ahead of steam going into the great financial crisis, actually, in the 07 timeframe, but it totally died down after that.
And coming back to it now, the insurance companies realize, you know what? People just don’t wanna necessarily deal with one insurance provider. They wanna have an ability, like a stable value fund that has a wrap program.
Well, why can’t we have two or three or four insurance companies that we can be working with here and trusting the due diligence process that an organization is gonna lean into on that? So having more flexibility, having less of these disclaimers and less of these rules and having more broad risk management put into place, that’s really where a lot of our focus is. And also we like to build upon the institutional knowledge that has already been built and working with just the target retirement date providers.
So speaking to T. Rowe Price, BlackRock, Vanguard, all of these organizations realize that there is something that is needing to be done in this space, but how do you get to a place that is gonna be palatable for everybody? We haven’t quite gotten there yet.
And I can tell you that some of the larger organizations that we’ve seen that have wanted to have some kind of income solution, usually it is actually the out of plan type of adopted solution, the Hewler Income Solution that is the easiest one to put out there and say, listen, we hear that you want this. Here’s something that you could put into place. It’s specifically for you.
Here’s the link to it and away you go. By the way, on that front, you have to approach your due diligence, whether it’s in plan or out of plan as thorough as you would with anything. And so if you are going to make a recommendation, even if the liability is gonna shift over to the plan participant and that out of plan solution, well, as good Arisa fiduciaries, you wanna feel really confident that you’ve made a lot of good decisions along that road.
And it’s not just merely, hey, you go figure it out on your own. Your employer has done the work. Here’s the due diligence that backs it up.
So not a lot of product. There’s a lot of concepts and you have to really lean into the toolkit of, all right, where’s the minutiae? Where are the details?
And one of the things that we do is we spend a lot of time reading through these things that probably nobody’s too interested in taking a look at, but you have to. And if you don’t do it, then you’re taking risk qualitatively. And that just to us isn’t something that we think makes a ton of sense for us.
So our clients, we believe, understand that, yeah, this is an idea that you need to be hearing about, talking about, but in terms of product development and flexibility around it, it all goes into figuring out what’s in the best interest of the participant. And I don’t think we’re there yet for the in-plan solution just quite yet. Yes, I see, I know they’re being adopted.
UPS, for example, did adopt something as well. So there are plan sponsors willing to go down that path right now. Our view is probably a little bit more conservative at this time, but never say never.
There’s probably gonna be an answer that’s acceptable, but for us and just the kind of working with our clients and our process, that’s where we’re at today.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and Bob, just to kind of close things out, complexity, operational complexity, we didn’t even get into that. How do you include it? How do you add it, right?
I mean, those are things that outside of making the decision, once you made that decision, Bob, you got to implement it. That in itself is complex.
Robert Scherzer, AIF, World Investment Advisors
It is, and once again, it’s what product are you showing? And there’s some that are inherently more complex than others. You know, and to Ed’s point, sometimes what happens is you do this work, the employer is very engaged.
They wanna do the right thing by their participants and they roll it out to 300 people and six people adopt it. You know, when it’s all said and done, it’s like, hey, is the juice worth the squeeze here? So, and then there are other employers that depending on the DNA and the, the makeup of their workforce, there might be a higher adoption rate.
So, it’s not going away. I don’t think it should go away. I think it’s an important topic and it’s just a matter of applying appropriate due diligence to figure out what’s best today and what might be best a couple of years from now.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, when you were saying that, Bob, it reminded me of the conversation that we’ve had for years and years about self-directed brokerage, when like less than 5% of the employee population uses it. Clearly a different type of apparatus, but this is clearly an important topic. Guys, we’re gonna have to leave it there, but guess what?
You are the power panel and we’ll bring you back again. John Shambari, Ed McElveen, Bob Scherzer. Great to talk to you as always.
Thanks for joining us and we look forward to having you back soon.
Edward McIlveen, CFA, Francis, LLC
Thank you so much. Thank you.