As Collective Investment Trusts (CITs) are becoming increasingly prevalent in the defined contribution (DC) space, many guaranteed lifetime income (GLI) products, including in-plan annuities, have been developed for use with CITs.
Robert Toth, Principal at the Law Office of Robert J. Toth, Jr., LLC recently published a white paper (PDF) assessing guaranteed lifetime income solutions in the context of a CIT. This blog is intended to summarize and bring light to key points from that paper.
To begin, there are two ways to offer guaranteed lifetime income in the context of a CIT:
- guaranteed lifetime income can be embedded within a CIT, or
- it can be purchased directly by the plan and managed alongside the plan’s CIT.
Many products on the market today have taken the former approach; however, there are several key areas where CIT embedded GLI programs have significant limitations. Our analysis of such programs concludes that while CITs have merits for certain institutional-use cases, they may not be an ideal choice for the delivery of guaranteed lifetime income. This is due to limitations around portability, complexity, and the personalization of guarantees.
The alternative solution – direct purchase of guarantees by a plan and managed alongside the plan’s CIT – solves many of these shortfalls and provides a level of efficiency over an embedded solution. In the table below, we compare these two approaches as they relate to the key areas mentioned above.
As you can see, the differences between the provision of guaranteed lifetime income options through CIT-owned insurance or plan-owned insurance are notable. Plan fiduciaries should carefully consider these factors when selecting a guaranteed lifetime income solution for their plan(s).
In addition to the factors outlined above, there are several other considerations that arise from embedding GLI in a CIT, which should be assessed accordingly. These include:
- Application of SECURE’s Safe Harbor: In an arrangement where the CIT’s investment manager selects the insurance company backing the guaranteed lifetime income program (CIT embedded GLI), it is unclear whether the plan sponsor would enjoy the same safe harbor protections as they would if the plan sponsor directly purchased the guarantees themselves.
- Security of the guarantees: Where a CIT owns the insurance policy, it is the insured party rather than the plan, or the participant. Since CIT guarantees are not governed by state insurance law protections, there is nothing that prohibits a CIT from cancelling the guarantees accumulated under an embedded GLI program.
- Permanence of GLI support services: Unlike with plan-owned annuities where the guarantees are provided by a highly regulated insurance company, the individualized guarantees provided under a CIT are dependent on a non-regulated service contract. These non-insurance arrangements should be carefully assessed to determine if they have the longevity necessary to meet their obligation for providing lifetime income.
- Impact of plan document changes: Plan sponsors should evaluate whether implementing a GLI embedded GLI program would require changes to the plan document and, if so, whether any changes would affect the plan’s pre-approved status.
For the reasons outlined above, an approach where the plan directly purchases the guarantees necessary for a GLI program may offer several key advantages.
How does direct purchase by a plan work?
Instead of embedding the GLI program in a CIT, plans can purchase an annuity contract directly from the insurer and manage them alongside CIT investments. This approach eliminates the need for a third party to calculate and credit payments, which can instead be made directly to participants by the insurer.
Note that there are multiple ways to implement a GLI program when guarantees are purchased directly by a plan. Annuity purchases can be offered by a plan as a standalone investment option, or through a fiduciary advice program such as a managed account. GLI programs can also be made available as part of non-CIT target date solutions – including personalized Target Date Funds (TDFs).
For further analysis of different retirement income solutions and implementation options, download our latest white paper, Navigating the market for guaranteed lifetime income products (PDF).