/>iTo address retiree risks, sponsors of 401(k) and 403(b) plans are offering in-plan lifetime income solutions. There are a number of options, but one that incorporates both a guarantee of lifetime income, participation in investment gains while providing downside protection, and withdrawal flexibility is the “guaranteed withdrawal benefit” or GWB. The important thing to remember is that the GWB combines investment in a specified professionally managed fund (a target date or balanced fund) with aninsurance company guarantee of lifetime income.
As with any plan decision about investments and services, a plan’s fiduciaries must engage in a “prudent process” to select the GWB and to choose the insurance company provider. While a plan’s decision-makers (the fiduciaries, perhaps a plan committee) may not be familiar with evaluating insurance companies, they can take comfort in knowing that the fiduciary responsibility is not to selectthe “best” insurance company, but instead is to engage in a prudent process . . . and that the steps in that process are defined:
- Determine and gather the information that is relevant to making an informed decision.
- Evaluate that relevant information.
- Make a reasoned decision based on that information.
These steps should be familiar; they are the same as the steps for evaluating the investments offered by a plan. However, the “relevant information” is different than for mutual funds and other investments. Since most fiduciaries are less experienced at selecting insurance companies . . . and to overcome any discomfort that may cause ... we have worked with an insurance consultant to identify the information that fiduciaries would usually want to see. That information is described in Appendix A: Sample Checklist for Evaluating an Insurance Company in our White Paper, “Fiduciary Process in Evaluating In-Plan Guarantees.”
There are four main areas that fiduciaries should consider when evaluating an insurance company:
- Financial strength of the company.
- Evaluation by the rating agencies.
- Commitment and success in the insurance industry.
- Diversification of the business lines For each of these major categories, the checklist indicates
For each of these major categories, the checklist indicates the information to be assessed, how to obtain the information, and, where relevant, how to compare the information gathered on different providers.
Further, the Checklist provides a step-by-step roadmap, with specific information about what to review and where to find it. To make this even easier, the insurance consultant evaluated Lincoln Financial Group by applying this process and determined that plan fiduciaries could select it as a prudent choice to ensure retirement benefits.
Excerpts from checklist on how to evaluate an insurance company:
| Items to be Reviewed | Where or How to Obtain Information |
Benchmark/ Parameters for What is Considered Prudent by Fiduciaries |
|---|---|---|
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FINANCIAL STRENGTH OF COMPANY |
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Fortune 500 Ranking: Life & Health Insurance Companies |
Life & Health Insurance Companies are either listed as a “stock” or a “mutual” insurance company. The information is available at the following website: http://money.cnn.com/magazines/fortune/fortune500/2013/full_list/ index.html |
Rankings of insurance companies are based on annual total revenue, which is defined as premium and annuity income, investment income, and capital gains or losses but exclude deposits. A history of strong and increasing revenue growth is a good indication of financial health. A ranking should be in the top 10 for Life & Health insurance companies in the Fortune 500. The 10th largest U.S. based Life & Health insurance company had annual revenues of approximately $10 billion in 2012. This annual revenue can be used as a baseline when assessing the size of an internationally owned insurer |
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EVALUATING BY RATING AGENCIES |
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Ratings from each of the rating agencies to determine the consistency (or lack of consistency) among the rating agencies. |
Insurance Company Annual Report website; or \ Individual rating agencies www.ambest.com www.fitchratings.com www.moodys.com www.standardandpoors.com |
Acceptable ratings for financially strong companies are considered: A.M. Best: A- or Higher Fitch Ratings: A- or Higher Moody’s: A3 or Higher Standard & Poor’s: A- or Higher |
We address issues in greater detail in a white paper published in March 2013 entitled "Lincoln Secured Retirement Income (sm) Solution: Addressing Participant Retirement Income Risks.” Possible solutions for these risks are addressed in a second paper, from March 2014, entitled “Lincoln Secured Retirement Income (sm) Solution: Fiduciary Process in Evaluating In-Plan Guarantees.” Both are available to download at www.lincolnfinancial.com/sri or www.drinkerbiddle.com/resources
