401(k) Specialist Issue 2 - 2022 - 37

401(k) STRATEGIES
coverage our assets actually provide.
This societal shift has already occurred,
yet those most impacted haven't entered
retirement, so we haven't fully felt the societal
magnitude of retirement income liabilities.
Nor have we felt the extent of the loss of
liability coverage that's already occurred due
to employers not helping to meet employees'
retirement income liabilities.
Those with whom I have spoken have
sought to address my fear by noting that
if we were to map the assets in defined
contribution (DC) in the same graphic, we
would see an inverse of the pattern above,
or a dramatically rising curve of assets saved
within the DC space.
While I agree that the DC system has
amassed material assets, I feel less confident
that the system will provide the same type
of coverage to the average retiree that DB
plans once did.
Specifically, I'd like to see data that convinces
me that:
* The same proportion (not the number)
of American households covered by DB
are now covered by DC plans.
* The value per household of wealth
through a voluntary saving system is similar,
again per capita, to that accrued under
one that's employer-provided, and the
asset base remains stable during a period
of a secular market downturn. With a
DB system, the beneficiary's experience
is that, irrespective of equity market correction,
interest rate changes, and/or shift
of mortality curve (broad increases in life
expectancy), they receive the same periodic
income, sometimes even including a
cost-of-living adjustment.
* The benefits of the DC system accrue
in the same proportion as did DB to
minority populations.
Until I am convinced of these points,
I will remain concerned by the DC
asset-oriented view of the world and
whether or not society and its citizens will
be as well-served by the DC system as the
DB system.
" The crux of
the difference
between asset
and wealth
management is
understanding
the lens to view
the world. "
As a person who has spent her career
in the insurance field and liability management,
I believe the average American
is better served by more liability coverage
than more assets. Now that DB plans are a
thing of the past, I believe that annuities,
whether offered in-plan or retail, are the
only broadly available product category
that can provide lifetime income liability
coverage.
Both the Employee Retirement Income
Security Act of 1974 (ERISA) and the
Investment Advisors Act of 1940 govern
fiduciary conduct by financial professionals
in asset management (left side of the
balance sheet), which differs from wealth
management. Wealth management means
the management of the intersection between
assets and liabilities for the benefit of
the PERSON to whom wealth can accrue.
Insurance and annuities are generally
perceived by those who view the world
through a left-side-of-balance-sheet lens as
a rather costly form of asset management.
Those who view the insurance industry as
the " liability management " industry rather
than as the " expensive asset management "
industry have little difficulty explaining
why we think our industry complements
the asset management industry in the
wealth management discipline.
The crux of the difference between asset
and wealth management is understanding
the lens to view the world. In the case of
asset management, the not-personal lens
required of the fiduciary is how the investment
performs. In the case of wealth management,
the lens is the human experience
of he/she/they who sits across the table
from you and who comes to own assets.
Assets occur on the left side of the
balance sheet. Insurance is a liability management
(right side of the balance sheet)
tool. Investments are assets. The role of
an investment steward is a well-defined
premise. Serving as a fiduciary in this field
means one's role in a plan is to maximize
asset accumulation for a given level of
documented risk tolerance.
Retirement income, however, is an
income statement premise, not a balance
sheet premise. This field of retirement
income within DC plans is nascent.
SECURE Act guidance suggests that
the appropriate fiduciary framework for
lifetime income provision is to analyze
trade-offs between benefits and costs of
products that provide liability management
(for a given set of income-providing solutions
made available by the plan's chosen
service providers). It also suggests that their
objective when making a recommendation
is not necessarily to minimize costs. This
is the guidance (and not just about cost
minimization) on how a fiduciary analyzes
retirement income because an accumulation-oriented
framework applies to an
income-statement-oriented objective.
With the wide-scale loss of DB coverage
in the United States, it is more important
than ever for plan advisers to equip
themselves to help plan participants address
their retirement income liabilities. Getting
educated on the possible solutions and
employing a repeatable process in analyzing
and matching these solutions to the plans
is critical. It's critical to the success of the
next generation of plan advisors and, more
broadly, to our aging society's well-being
that needs basic retiree expenses covered by
reliable income sources.
Michelle Richter is the Executive Director of
The Institutional Retirement Income Council, a
non-profit, membership-based organization of institutional
retirement plan advisors and Principal
of Fiduciary Insurance Services, LLC.
ISSUE 2 2022 | 401kSpecialist.com
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401(k) Specialist Issue 2 - 2022

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