401(k) Lifetime Income: A Fiduciary Minefield

The insurance lobby has spent millions of dollars pushing out so-called education via the American College and even getting Congress to pass the SECURE Act, to push Lifetime Income but most of the sophisticated plans sponsors are not biting and for good reason.

One of the most basic fiduciary principles is diversification – i.e., you do not put all your eggs in one basket.  Most investment policies for a fixed income portfolio will limit single entity credit risk to 5% of that option.   However, thousands of plans are tricked into taking on 100% exposure of a single insurance company with many annuity products including lifetime income.   100% single entity credit risk and liquidity risk is a serious fiduciary issue.

Many advisors are paid well via backdoor commissions to push annuities on plans.  These commissions come via the advisor or an associate having an insurance license.   Is this commission disclosed? Is it a prohibited transaction?

Insurance companies brag to stock analysts that they make over 200 basis points (2%) in hidden spread on annuity products.  Is this reasonable?  Is it disclosed? Is it a prohibited transaction?

In the contract does the insurance company say that they accept ERISA fiduciary duties?    Does the contract have a downgrade clause that allows the investor out if the company is downgraded, or do they have to ride it all the way to default?

Doing due diligence on the annuity contract is difficult.  What state was it issued out of and is regulated by?  How solid is that states regulatory framework?  What is the minimum capital requirement for this contract for that state?   How large is the insurance reserve pool for that state (hint many are $0)?

The Federal Reserve itself has expressed concerns about the high risk of the insurance company general account products and the flimsy nature of the state guarantees backing the insurance contracts.[i]

The insurance lobby insists the SECURE Act can act as a fiduciary Get Out of Jail Free Card.   In light of recent Supreme Court decisions, should plan sponsors be willing to take that risk?

Chris Tobe, CFA, CAIA is an expert on insurance products writing the book the Consultant and Plan Sponsors Guide to Stable Value, and dozens of articles. He served as a VP for Transamerica for 7 years in annuity product management.  http://www.christobe.com/stablevalue/

[i]  Federal Reserve Bank of Minneapolis Summer 1992  Todd, Wallace  SPDA’s and GIC’s http://www.minneapolisfed.org/research/QR/QR1631.pdf

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