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Portability Is Key to Lifetime Income Solutions

Retirement Income

More than three-quarters of employers say they are highly interested in incorporating a lifetime income solution into their plan. However, one important need must be met before realizing widespread adoption: easy portability of the lifetime benefit. 

Charles E.F. MillardThis issue is a crucial element to solving the retirement income crisis our country faces. 

The portability challenge confronts three distinct constituencies in the world of retirement: employers, their advisors, and participants themselves. Here’s what to consider when assessing a solution.

Portability from Recordkeeper to Recordkeeper

For employers, the challenge is straightforward. What if you want to change recordkeepers in the future? Recordkeepers are the infrastructure that makes the retirement system work. But from time to time, their service level may go down or their prices may go up. When that happens, employers may want to—and should be free to—change recordkeepers.  

For plan advisors, the challenge is similar. A key part of the plan advisor’s role is to regularly oversee service and pricing levels. Sometimes they do this through a new bidding process. To do so, they first need to understand the marketplace and would understandably be reluctant to adopt a lifetime income solution that could not later be transferred along with the rest of the plan accounts. 

In both cases, the ability of the employer or plan advisor to get the best combination of pricing and services is eroded. They also risk losing the lifetime income benefit for their employees if the new recordkeeper does not offer the same benefit. 

Ease of Portability

Switching recordkeepers can be daunting under the simplest of circumstances, and therefore ease of portability must be a consideration. There are two elements to solving this problem, and both are meant to make things easier for the recordkeeper:

  • First, a few lifetime income solutions are tradable like a security. They have a number assigned by the Committee on Uniform Securities Identification Procedures (a CUSIP). When a lifetime income solution has a CUSIP, the recordkeeper can add the lifetime income solution by simply adding the CUSIP to their menu. Most lifetime income solutions, such as individual annuity options and lifetime income wrappers, do not have their own CUSIP, but a few do. 
  • Second, some solutions are associated with middleware. Middleware can be provided by a third party or by the annuity solution itself to help the recordkeeper keep track of the lifetime income benefit. Middleware can simplify the amount of work for the recordkeeper, because the middleware helps communicate information from the employer to the insurance carrier to the recordkeeper. Like the CUSIP, this makes things easier for the recordkeeper. It also makes it more likely that the solutions with middleware will be portable and available from multiple recordkeepers.

Ability to Maintain the Lifetime Guarantee

Of course, the reason we care about lifetime income at all is because we want to address the retirement income crisis faced by so many American workers. How does portability—or lack of it—affect them? 

If the employer does offer a lifetime income solution in its defined contribution plan, what happens if the employee chooses to change jobs?

In that case, the employee must have optionality. They should either be able to roll the benefit into their new employer’s plan, or at least to an individual retirement account (IRA). This requires that the new employer is using a recordkeeper that also offers this (hopefully CUSIP-based and middleware-supported) solution.

If the new employer's recordkeeper does not yet offer this solution, the employee must nonetheless have the option to roll the solution to an IRA or an individual annuity—one that allows the participant to retain every dollar of guaranty that has been earned. Most lifetime income solutions do not currently offer this option, but some do.

Ask These 4 Questions

When analyzing lifetime income solutions, consider portability carefully. Ask yourself:

  1. Is it truly portable for all parties?
  2. Does the solution have a CUSIP?
  3. Does it have middleware that makes life simpler for the recordkeeper?
  4. Does it have the ability to protect the individual participant's guaranty no matter what? 

Make sure it does.

Charles E.F. Millard is the former Director of the United States Pension Benefit Guaranty Corporation and a Senior Advisor for Annexus Retirement Solutions. 


Opinions expressed are those of the authors, and do not necessarily reflect the views of NAPA or its members.