Lifetime income solutions are a hot topic in defined contribution—and people have questions! Here, we touch on five common objections and concerns that arise around the rationale for including these options within plans, particularly when they are made available as part of the qualified default investment alternative (QDIA).
1. Why should a plan sponsor go through all the work and take on the risk of adding lifetime income solutions?
First, it may be less risky than plan fiduciaries think, especially with more support and education available and with the safe harbor under the SECURE Act. Second, it’s expensive to plan sponsors when participants don’t retire on time. Those who provide the protections that come with lifetime income solutions give participants the confidence to retire when they’re ready to step away from work—and not later. Not only does this result in higher wages and benefits but it slows the cycle of promotion that is important to retain quality employees.
2. How does a plan fiduciary select and monitor lifetime income solutions?
Lifetime income solutions and annuities are new territory for many plan fiduciaries. Fortunately, associations are focusing even more attention on general education, certificate programs (e.g., the American Retirement Association) and training, which go a long way toward closing the knowledge gap. By starting with the question of the function of a lifetime income solution within the plan and understanding how it serves participants, a plan fiduciary can identify appropriate choices and set themselves up to prudently select and monitor one that fits the plan.
3. If a lifetime income solution is the QDIA, doesn’t that add costs for the younger participants who are far away from retirement?
Even when a lifetime income solution is included as a default in the QDIA, the guarantee often does not apply until a window prior to retirement. Specific design and glidepath characteristics vary—and this is an evolving space where providers continue to enhance their offerings. In some cases, the lifetime income solution fits within the fixed income sleeve and offers a similar return while also providing an income guarantee down the road if the participant needs it.
4. Why impose a lifetime income solution on all participants as part of the QDIA when some may not want or need it when they retire?
Plan sponsors integrate lifetime income solutions as a protection for participants. An annuity is a form of insurance that can provide protection against future fluctuations of the market. In the years immediately before and after a retiree starts to rely on their nest egg for retirement income, the retiree is especially vulnerable to market fluctuations.
A lifetime income solution which is part of the QDIA provides protection against those fluctuations—for all participants in the default, including those who have low engagement with the plan. Just as you’d rather that your house not burn down even if you buy insurance, you’d rather the markets do well. However, protection that insulates participants against market downturns also enables them to retire on time with confidence when volatility strikes.
Of course, there is a balance to the cost of this protection and how it may affect performance. Plan sponsors should always be aware of the value to participants who do—and don’t—end up taking income at retirement. The accumulation value of the account is an important metric alongside guaranteed or potential income.
5. If participants really want annuities, they can buy them in the retail market. Why not let them do that?
A key reason for plan sponsors to provide lifetime income solutions for participants is access. Many participants, particularly those with lower income and lower savings, may not already work with a trusted advisor. Very few investors are knowledgeable enough about annuities to buy them on their own. In the absence of a solution within their plans, many participants will not have any of the protections that these solutions offer.
Tamiko Toland most recently served as Director, Retirement Markets for Toronto-based CANNEX, and brings 20 years of experience tracking trends and key issues on retirement income. She received the 2021 Educate Pillar Award from the National Association for Fixed Annuities (NAFA) for her contributions to annuity retirement education.
