I had to chuckle a bit when I first read Nevin Adam’s excellent (of course) recap of the latest DC class action lawsuit, this one involving JP Morgan Chase Bank’s DC plan’s selection of stable value funds. He noted the complaint alleges that “throughout the Class Period, identical or substantially identical stable value funds with higher crediting rates, and hence lower spreads, were available to the Plan, but were not selected by Defendants.” In trying to make this point, the pleadings offered something called a “comparator chart,” attempting to compare annuity contract based stable value funds.
Image my surprise-and that chuckle- when I saw that about a third of the “funds” listed in that chart included annuity contracts on which I worked for nearly two decades. Having now captured my interest, the merits of the lawsuit aside, that chart and the related allegations reminded of an important lesson when dealing with any annuity: do your homework first or, as my mentor Roger Siske would regularly advise, know what you don’t know.
This advice holds for the fiduciary activity we are seeing in the DC lifetime income market. There are substantial, and critical, efforts in play which will serve to assess the annuity pieces of income programs. As I’m sure those working on these evaluation models have found, assessing annuities is a dynamic process. It involves putting any contract under any particular plan or arrangement in “context.” The designs, terms, crediting rates and the like shift over time and circumstance, and may well apply differently depending on the arrangement.
There’s a couple of examples to make this point. First is the retail fixed index annuity (FIA). This type of contract may well serve the individual “wealth” market, but is mostly inappropriate for use in a retirement plan. However, where an FIA is designed for retirement plans, it offers some of the most efficient vehicles for a plan’s delivery of lifetime income guarantees. So, relying upon details of the retail FIA when assessing a plan-designed FIA is, in my judgement, not “doing the homework.”
Then there’s the notion of an exploring an insurer’s “spread,” an inquiry often made by fiduciary advisors. An insurer’s setting of crediting rates or “bonus” levels (often found in a GLWB) at any particular time can often be dependent on some unusual time-dependent factors. This may include the insurer’s own risk capacity at the time of the setting of the rate (yes, capacity is a real “thing”); the market’s interest rate environment; an insurer’s own “reserving requirements;” or their particular interest (or disinterest) in expanding in certain portions of the market. Translating “spread” (even if you can somehow calculate it uniformly or precisely) is, quite frankly, meaningless for a fiduciary. It tells a fiduciary little about the guarantees being offered. It would be an example, again in my judgement, of not knowing what you don’t know.
It is encouraging to see the work being done in lifetime income assessments, and pleadings like we are seeing in the JP Morgan class action are a reminder of the importance of spending the time and effort to get it right.