A new study suggests that a growing number of U.S. employers are adding, or are interested in adding, lifetime income solutions to their DC plans. But a closer look reveals some nuances.
Amid heightened concern over an aging workforce, increasing longevity and the financial health of their workers, Willis Towers Watson’s 2019 Lifetime Income Solutions Survey of HR and finance executives at 164 large and midsize U.S. companies found that 30% of employers currently offer one or more lifetime income solutions – up from 23% in 2016.
An additional 60% of sponsors are either considering adopting lifetime income solutions or would consider them in the future, as part of their efforts to help workers create a steady stream of income from their plans while they are in retirement.
When asked why they either adopted or are currently considering adopting lifetime income solutions, three out of four respondents (74%) cited concern over an aging workforce and increasing longevity, a sharp increase from 45% in 2016. A similar percentage (74%) cited their focus on retirement readiness, while nearly half (49%) cited a shift from a DB plan to a DC plan as their primary reason.
Beyond Annuities
When referring to lifetime income solutions, many immediately think of annuities. For purposes of Willis Towers Watson’s survey, however, lifetime income solutions also include education and planning tools to help participants determine how to spend down accumulated savings during retirement, as well as in-plan and out-of-plan options that create steady streams of income from DC plans.
Among those that offer lifetime income solutions, the survey found that the most prevalent options offered are systematic withdrawals during retirement (88%), lifetime education and planning tools (70%) and in-plan managed account services (44%).
Less common are the solutions designed to help participants develop a steady flow of income in retirement, typically involving both an investment and annuity component. Only 17% offer an in-plan asset allocation option with a guaranteed minimum withdrawal or annuity component, while 15% offer out-of-plan annuities at the time of retirement, according to the findings. In-plan deferred annuity investment options are also offered by 15% of these employers.
The study further shows, however, that 41% of respondents that either currently offer or are considering offering a lifetime income solution are considering adding an in-plan asset allocation option with a guaranteed minimum withdrawal or annuity component in 2021 or later, while 31% are considering adding an in-plan deferred annuity investment option. About a quarter (23%) said they are considering adopting out-of-plan annuities at the time of retirement.
“While it’s encouraging more employers are embracing various lifetime income solutions, it’s disappointing relatively few have adopted what the industry sees as more effective income-generating solutions, such as annuities and other insurance-backed products,” notes Dana Hildebrandt, director of Investments at Willis Towers Watson. “However, employer interest in these options may pick up steam as they better understand the value and associated benefits.”
Interestingly, the study notes that there was a significant shift in why some plan sponsors are not currently considering lifetime income solutions. Nearly 70% cited administrative complexities as a barrier to adoption – up from 53% in 2016. Conversely, the percentage of employers who cited fiduciary risk as a barrier fell from 81% in 2016 to 62% this year.
Hildebrandt suggests that, despite these barriers, the firm expects more plan sponsors will evaluate the various lifetime income solutions in the marketplace as they continue to help prepare their employees for a financially secure retirement. “Employers will need to monitor retirement legislative and regulatory developments around safe harbors and fiduciary liability, which could provide some added level of comfort when considering a lifetime income solution for their participants,” she advises.
The SECURE Act now pending in the U.S. Senate includes a provision providing a fiduciary safe harbor for sponsors that want to include a lifetime income option in their DC plans, but there continues to be an ongoing debate about whether that would be enough to overcome the apparent hurdles.
