Savings & Investing

A safe harbor for retirement income solutions

Nov 11, 2016
By Kevin Hanney

Better, clearer regulation could make lifetime income plans a viable and attractive alternative for workers participating in their employers’ qualified retirement plans.

After reviewing existing literature and considering a number of references, including our own experience with the application of safe harbors and regulatory guidance in the development of the United Technologies Corporation Employee Savings Plan Lifetime Income Strategy, we offer a suggestion for enhancing the existing regulatory framework governing qualified retirement plans in the U.S. in such a way as to promote and facilitate wide-spread adoption of effective lifetime income options.

Most importantly, we recommend that any safe harbor or other form of regulatory guidance emphasize specific descriptions of the functions of plan features and/or options available to participants in defined contribution plans and expressly avoid references to specific products, product categories and industry jargon wherever possible. We believe stressing features and functions in the regulation not only simplifies drafting for regulators, but it clarifies their intent and supports the plan fiduciaries charged with determining whether or not competing solutions adhere to the regulations and how they might avail themselves of the protection afforded under the safe harbor through a clear and reasonable standard of care. Regulation focused on functional descriptions will also facilitate ongoing industry investment in research and development, whereas product-based language will stifle innovation and stall progress.

For our part, United Technologies Corporation (UTC) met with the US Department of Labor in 2011 and recommended they define and adopt the term “qualified retirement income alternative” or “QRIA” if they were to publish a new safe harbor and/or revise existing guidance. Under our definition, which remains admittedly undeveloped, a QRIA might fit under a number of product labels, but in order to receive coverage under a safe harbor or some other form of regulatory endorsement its principal function must be the provision of income to the plan participant and/or their beneficiaries. For simplicity, we will use the term QRIA throughout.

It was always intended that the definition of a QRIA should deliberately allow for the income mechanism and/or the nature of the resulting income to be open-ended and that the language of the regulation should state that explicitly. A properly defined QRIA would unmistakably encompass plan features and options which might integrate annuity contracts, systematic withdrawal methods, and services to help participants determine when to drawdown retirement savings from qualified plans, individual retirement arrangements and other sources of retirement income, including when and how to claim Social Security benefits or any combination of these or other approaches. To be clear, a QRIA safe harbor would cover retirement income features which may or may not last for a lifetime, may be acquired in exchange for an explicit fee or premium, might otherwise occur as the consequence of some conversion of qualified assets into one or more plan distributions either in isolation or in combination with non-qualified assets and/or other sources of income such as Social Security benefits or traditional pension benefits and would accommodate both opt-in and opt-out choice architecture for participant utilization.

We note here that in spite of the QRIA’s emphasis on retirement income, a prudently drafted safe harbor would allow for QRIAs that offer features and options which preserve the freedom and flexibility that Americans have not only come to expect, but we would argue are a necessity in a modern retirement plan if it is to function effectively across a broad and diverse population of participants and beneficiaries.

In order for regulations to promote maximum utility and potentially garner the broadest degree of adoption, they should encourage the development of robust and pragmatic retirement solutions. It is reasonable to expect that regulation which anticipates a wide range of needs and circumstances should allow for an equally broad variety of assessments and conclusions as to an adequate balance between costs and benefits. Features such as longevity protection, liquidity, portability, price certainty, competitive cost, and transparency are all important, but each is subject to a trade-off between its cost and benefits which should be left to the judgment of a prudent fiduciary as each feature should be valued according to the unique needs and constraints of a plan and its participants, whether it be an exceptionally large and well established savings plan for an economically and demographically diverse industrial concern, or a newly established 401(k) for an entrepreneurial start-up in the fields of tech, life sciences or professional services.

We hope UTC’s experience developing our Lifetime Income Strategy might serve as an example of how a plan fiduciary can use safe harbors in practice. We conducted a careful review of the regulations governing both QDIAs and Annuity Selection in Individually-Directed Plans and made some critical determinations with respect to our design requirements. The program needed to be simple and flexible for participants to use, but operate on a highly sophisticated level under the oversight of a professional investment manager. We performed functional analysis on a host of products before adopting a final design for the Lifetime Income Strategy. Focusing on the principle components of each available alternative and how they related to regulatory guidance enabled us to perform side-by-side comparisons, reinforce our objectives, dispel misconceptions and ultimately make our final selection.


Author: Kevin T. Hanney

About the author

Kevin T. Hanney
Director, Pension Investments, United Technologies Corporation (UTC)

Kevin Hanney has been a member of the New York and Connecticut investment communities for over 12 years. He recently went global, having joined UTIMCo in May of 2005, taking responsibility for the firm's non-US pensions.

Prior to joining UTIMCo, Hanney was Senior Investment Analyst for the 1199 Health Care Employees Pension Fund in New York City where he was responsible for day-to-day operation of the fund, focused primarily on US Equity, private equity, and overlay strategies. Hanney previously held positions with Parametric Portfolio Associates and Pimco Advisors, LP.