In our winner-take-all culture, we rank, rate and score everything. Seriously, everything. Jupiter has 16 moons, and I’m betting somewhere there’s a list that ranks them and/or scores them across any number of criteria.
So, in that vein, along comes the Institutional Retirement Income Council with a scorecard on how plan sponsors can evaluate the suitability of annuities as an investment option within an employer-sponsored defined contribution retirement plan.
“Retirement income strategies are one of the most innovative developments to hit the retirement industry and represent a true enhancement to participant-directed retirement plans,” says Mendel Melzer, an IRIC member and chief investment officer for The Newport Group. “However, these strategies must be adopted and monitored by plan sponsors according to the rigorous demands of ERISA, which charges employers with selecting and monitoring investment options using a prudent process that would be employed by an industry expert.”
IRIC’s scorecard includes five major criteria to demonstrate that the plan sponsor has followed a prudent process in selecting and monitoring an annuity option:
1. Efficacy of the underlying investment process
2. Nature of the lifetime income guarantee
3. Counterparty strength
4. Product cost including both investment management and insurance
5. Operational flexibility including both plan sponsor and participant level
Each element gets scored on a 1-5 (low to high) scale and then the plan receives an overall average composite 1-5 score; 3 or higher means the retirement income strategy is sound, while 3 or below means an annuity should be put on a watch list.
Melzer compares the need to review and rate annuities to a similar scrutiny previously given to target-date funds "Just a few years ago, target-date funds were new and untested, and plan sponsors and consultants needed to develop a framework for evaluating them when they first hit the market," he says. "The same creativity must now be applied to retirement income products for them to become a successful component of a plan sponsor’s overall retirement plan strategy.”
Obviously, more useful than ranking the moons around Jupiter, but perhaps still an idea whose time has not yet arrived. What do you think? Share your thoughts in the comments.
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