Doing as They are Doing, Not as They are Saying

Trivia buffs could tell you that the only X-rated movie ever to win the Oscar for Best Picture was Midnight Cowboy (I know, it wouldn't have been X-rated 10 years later, but they had different standards back then). Many who know that would know the theme song from the movie, but paraphrased slightly and with apologies to Harry Nilsson, it could also be the theme for today's defined contribution (DC) plan sponsors:

Everybody's talking at us, But we don't here a word there saying, only the echoes in our minds

Great song if you're one of the six people who has never heard it. But, why, you might ask is this lunatic who hasn't been blogging this week (I talk some time off for the birth of a granddaughter) writing about a 40+ year-old song? Aon Hewitt did a survey of DC plan sponsors and found that only 3% plan to add in-plan annuity or insurance products to their plan in 2011. But, in other surveys, those same plan sponsors are saying that such products are a hot topic and that they are on of their highest DC plan priorities.

Get the song reference now?

Instead of going down what they are hearing and even know is the right path,

They're going where the sun keeps shining, through the pouring rain, they're going with what's closest to their nose

The simple fact is that nobody wants to be first. Yeah, I know, somebody has to be first, but that is often a road fraught with mine fields. But, there was a first 401(k) plan. There was a first cash balance plan. There was once a first target date fund, and now, flawed as they are, very few sponsors are afraid to walk that road once less traveled.

So what are the holdups? In my opinion, it all falls under the category of risk. Once upon a time, if there was no regulatory guidance, the prevailing strategy was to just go out and do it, but no more. With apologies to The Shadow, who knows what evil lurks in the hearts and minds of plaintiff's bar? Litigation is rampant. As a plan sponsor, even if you know you can win, the cost of defense may be prohibitive.

And, look at the guidance that we do have.While we don't have to worry about the safest available annuity rules for DC plans since PPA, the DOL's annuity guidelines for DC plans don't leave much more room for exploration. Having one of these products in your plan is a fiduciary decision. Title I of ERISA is fruitful ground for litigation. Is your plan ready to be the test case?

What happens when your employees leave your company? Can they actually roll these new-fangled products into their new employer's plan? That's a tough one, but as of today, the answer is probably that in most cases, they will have to find a way to keep that option when they leave.

So, everybody seems to want something, but nobody's doing it yet. What might change that?

1. A safe harbor for these products in DC plans so that fiduciaries going down this path will have less worry of regulatory or even litigation issues.
2. A more fertile field of products which will only come when more plan sponsors adopt these sorts of products for their plans.
3. A requirement that DC plans have some sort of lifetime income option as compared to just lump sums (taken by virtually all participants) and installment options. Of course, participants, even those who know that a lump sum has no longevity protection, are currently unlikely to consider anything else.
4. Reasonable fees. The risk for insurers in offering products of this sort are high, especially when there is anti-selection among the group of people electing them. Insurance companies are not in business to lose money, so fees and expenses are currently high. As the market becomes larger, so perhaps will fees and expenses become more competitive.

We're not there yet, but to complete your lyrical madness for the day, perhaps sometime soon, plan sponsors will be moving from where they are and 

Backing off of the lump sum wind, sailing on annuity breeze, skipping over ERISA like a stone ...