Prudential Financial: Retirement Plans Prepare for Final Fee-Disclosure Regulations

Regardless of who's president, the retirement plan industry will continue provide a more secure retirement for companies' employees while the industry prepares for new federal regulations concerning the disclosure of fees, said a top executive with Prudential Financial.

From the industry's perspective, regardless of who wins the election in November, "we're primarily focused on what could we be doing as a company to help create retirement security and transform the U.S. retirement system," said Harry Dalessio, senior vice president of strategic relationships for Prudential's retirement business. He spoke with Best's News Service at the company's 2012 global economic and retirement outlook briefing Jan. 4 in New York

Defined contribution plans such as 401(k) retirement plans are a multitrillion dollar market, and other than someone owning a home, they represent "the largest savings most U.S. workers will have in any form," he said, noting helping workers save for retirement is "nonpartisan." There will be opportunity for plans regardless of which party is in the White House in 2013 to help ensure that plan sponsors can "help deliver retirement security to their employee base," Dalessio said.

Meanwhile, low interest rates and volatile stock markets are spurring 401(k) plan participants to seek advice regarding their plan's investment options, Dalessio said.

Last September, insurance interests welcomed a U.S. Department of Labor decision to start anew on a rule to define the role of a fiduciary under the federal Employee Retirement Income Security Act. Its Employee Benefits Security Administration shelved a proposed definition that critics warned would lead to fewer brokers and consultants serving employers that offer defined contribution retirement plans, increased costs and less choice for plans and individual retirement accounts (Best's News Service, April 25, 2011). The DOL was to issue the new proposal early this year (Best's News Service, Sept. 20, 2011).

"Ultimately, the right intent played out," Dalessio said. As more feedback is taken into account, "they usually end in the right spot."

The re-proposed rule will address concerns about the potential impact on fee practices of brokers and advisers and clarify the continued applicability of long-standing exemptions that allow brokers to receive commissions related to mutual funds, stocks and insurance products (Best's News Service, Sept. 20, 2011).

The imminent issue plan record-keepers such as Prudential, and advisers and consultants, are focused on, he said, are the new DOL regulations concerning uniform fee disclosure for 401(k) plan sponsors under 408(b)(2) of ERISA. They'll be rolled out this year, and the industry is waiting on final guidance on how this will be "packaged and delivered," Dalessio said.

Meanwhile, calculating longevity, or people's life spans, is resulting in significant financial pressure for global providers of retirement income, according to a report by Swiss Re. In the United States, Canada and Europe, such risk represents more than $20 trillion in exposure for "occupational" corporate defined-benefit pension plans, Swiss Re said (Best's News Service, Sept. 2, 2011).

Over the past 10 years, most sponsors of traditional defined-benefit pension plans in the United States have gone from fully funded to under-funded at least twice, and in most cases, three times, Dalessio said. In some ways, they've had enough and want to reduce their balance sheet and funding volatility that comes from offering a pension plan. Traditionally, the insurance industry focused on the pension close-out market, where a company would effectively transfer all of its liabilities to an insurer, he said.

A newer concept in the United Kingdom and the Netherlands is a pension buy-in, Dalessio said. Prudential did the first transaction in the United States last June for Hickory Springs, a North Carolina-based company. Hickory Springs wasn't ready to terminate its pension plan and transferring the liabilities to an insurer but was looking to better secure the obligations of their retirees to reduce the plan's overall volatility, he said.

Prudential takes on the obligations and Hickory Springs could take a better approach to the active employees in its pension plan, Dalessio said. Life insurers, investment banks and asset managers are thinking about how to participate in the pension markets. The money involved "could be significant."

Prudential Insurance Company of America currently has a Best's Financial Strength Rating of A+ (Superior).

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)