Annuity Offerings Can Help Improve Michigan’s Defined Contribution Retirement Plans

A defined contribution retirement plan should be designed around certain well-accepted best practices so that it can meet the needs of employees, government employers, and taxpayers. These best practices range from adequate employer contribution levels to providing a wide array of investment options. If these best practices are not heeded, a defined contribution plan (DC) is less likely to achieve employees’ long-term financial security goals and will not support employer recruiting and retention objectives.

The Michigan legislature is currently considering two bills (House Bill 4733 and HB 4734) that bring the existing defined contribution plans for K-12 school employees and other public workers more in line with current retirement industry best practices.

One of the most important defined contribution design best practices is to provide an investment line-up that is focused on long-term retirement savings rather than simple near-term wealth accumulation.

Another best practice is helping an employee to receive an income throughout their retirement that they cannot outlive. Just providing for a lump-sum distribution of assets at retirement and leaving the employee to “figure it out” from there is inconsistent with some of the very reasons to offer a retirement plan.

These design principles address the critical concerns of investment performance and longevity risks that must be tackled by any retirement plan that hopes to meet its objectives. The bills in Michigan are intended to address both of these critical areas.  The bills state:

“In addition to the categories of investments provided by the investment board under subsection (1), the retirement system shall offer access to 1 or more fixed annuity options and may offer access to 1 or more variable annuity options provided by an annuity provider selected under this subsection. While a qualified participant is employed by the employer, the annuity options offered under this subsection must allow a qualified participant the ability to purchase a fixed rate annuity and an annuity with a guaranteed lifetime income option, and may allow a qualified participant the ability to purchase a variable rate annuity. Subject to subsections (4) and (6), the investment board shall select 2 or more annuity providers based on a competitive proposal process.”

Adding fixed and variable annuities to the investment selections available under the DC plans addresses the need to have long-term investments available to participants. It helps move the Michigan retirement plan to one focused on lifetime income and not solely on maximizing asset accumulation.  Further, the bills specify that a qualified participant must have the ability to purchase an annuity with a guaranteed lifetime income.

The key is that this provision enables the ability to purchase the lifetime income from within the plan during an employee’s time of service.  Without this ability, a participant wanting a lifetime income annuity would be forced to take a lump-sum distribution at retirement and then purchase an annuity on the spot market, where economic conditions may not be favorable.  Being able to purchase future income throughout the asset accumulation stage of a career and then convert to a lifetime payout annuity could very well result in better retirement outcomes.

Michigan’s defined contribution retirement plans have evolved over time and adopted a range of best practices for a well-designed public sector primary DC retirement plan. The improvements addressed in House Bill 4733 and HB 4734 would continue that tradition of ongoing retirement plan enhancement.  The investment offering and lifetime income provisions are two of the most important and impactful design elements in any retirement plan.  The improvements in these areas addressed in these bills greatly impact an employee’s ability to have a financially secure retirement, which also helps employers meet their recruiting and retention goals.