Lifetime income options have been a hard sell for defined contribution plans – but the SECURE Act and the Senate’s RESA both take steps to improve the odds. This week, we asked NAPA-Net readers about their experience – and expectations.
First off, it’s worth acknowledging that in the 2019 Retirement Confidence Survey (RCS), three in four survey respondents were interested in both in-plan options and rolling into new products at retirement. Moreover, half expect that a guaranteed lifetime income product will be a source of retirement income for them, up from 35% in 2018, though only a third of retirees report that they receive income from this type of product.
But even today, industry surveys indicate that only about half of DC plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. Indeed, less than 10% of plans offer an in-plan annuity option, according to the 61st Annual Survey of Profit-Sharing and 401(k) Plans by the Plan Sponsor Council of America.
This week we started by asking NAPA-Net readers if any of the plans they work with currently offer an in-plan retirement income option. Somewhat surprisingly (at least in view of those industry surveys), nearly two-thirds did (it may also be worth noting that this week’s response rate was a bit leaner than usual, potentially distorting the results). Moreover, about half of the respondents (54%) indicated that option was in the form of an in-plan annuity, though for a third (36%) it was a systemic withdrawal provision, and 1 in 10 (more than one response was permitted) had clients provided an institutionally priced annuity selection at distribution/termination.
Despite those relatively high responses, for a plurality of this week’s respondents (46%), retirement income options was discussed with clients/prospects only “occasionally” (though with that much take-up, there might not need to be discussion). Nearly a third (30%) did not discuss the subject, and the rest were in the “only if they bring it up” camp. As one reader explained, “This is back burner – they tend to be more interested in making sure people are accumulating enough.”
As for objections when the subject does come up – well, responses were varied. They included:
50% - complexity of offerings
43% - fiduciary concerns
42% - cost
42% - lack of portability for participants who choose and then leave
36% - lack of portability for the plan if they changed recordkeepers
28% - participants not interested
27% - participants won’t take advantage/don’t understand the option
14% - all of the above
Asked to winnow those objections down to a “most common,” the most frequently cited was the complexity of the offerings, noted by more than 4 in 10 respondents.
All that said, both the House’s SECURE Act and the Senate’s RESA legislation include provisions designed to encourage the expanded availability of retirement income options. We asked readers if provisions that would deal with portability concerns (by permitting plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments if a lifetime income investment is no longer authorized to be held as an investment option under the plan) would have an impact.
Responses were, as you might expect, varied:
28% - it won’t hurt, but it won’t help much
21% - it might help get some off the fence
14% - absolutely none
14% - no earthly idea
7% - it could be a game-changer
The aforementioned pieces of legislation also attempt to deal with some of the objections based on fiduciary concerns by providing an optional safe harbor to satisfy the prudence requirement with respect to the selection of insurers for a guaranteed retirement income contract.
Asked what impact that might have on decisions, respondents seemed to be a bit more optimistic; fully half (51%) said “it might help get some off the fence,” and 28% were willing to note that “it could be a game-changer.” Only 14% said it would have no effect, and the rest were of the opinion that “it won’t hurt, but it likely won’t help.”
As you might expect, we did receive a number of reader comments on the subject of retirement income as a retirement plan option. Here’s a sampling:
“It puts the plan sponsor in the role of having to deal with the retirement income factors for the plan rather than just accumulation.”
“This is just going to cause an unnecessary burden on Plan Sponsors and TPA firms!”
“Generally the attitude is: Participants have plenty of options to get outside help from an advisor.”
“I think this is a terrible option for employers and something employees do not typically have a full understanding of. In my opinion, a decision of this magnitude should be made between an employee and their personal financial advisor. This is a decision that could last 50+ years for employees and a full understanding just cannot be achieved with an in-plan option and host of unreadable disclosures. Most of my clients do not want the additional administrative burden of monitoring an additional plan feature or maintaining terminated participants in their plan.”
“Cost and understandability of retirement income products drives most participant interest in these options. There currently is not a lot of interest here. Plan sponsors have the same two concerns, and additionally, the provider’s financial viability. These concerns do not go away with any sort of safe harbor.”
“I think it is fine for the Plan Investment Advisor and/or participants’ Investment Advisors to discuss options like this with the participants, but it should definitely not be required to have these options available for Defined Contribution Plans – it will only complicate things more, increase fees, and create more need for burdensome disclosures that nobody wants or reads. Seems like this is just to drum up more business for insurance companies in my opinion. These options have always been available outside of Employer sponsored plans and I hope they stay out of DC plans. From my experience in this business, I find that most Plan Sponsors/Employers want the participant to remove their account balances from the Plan as soon as they terminate or retire, so even if this becomes an option, I highly doubt I would recommend it as a plan provision for a lot of clients I deal with.”
“I think these options are a necessity, but I don’t think they are currently getting the attention they deserve.”
“Until either (a) annuities are no longer the dominant type of retirement income option; or (b) annuities shed their reputation as high cost, impossible-to-understand vehicles, I believe little will change as to the lack of popularity of retirement income options, favorable regulations notwithstanding.”
“Participants can get income options outside of the plan now – why does it have to be in or through the plan?! Let participants continue to take their money out and use all or a portion of it to buy an annuity! Why do retirement plans need to keep adding stuff – linking them in obscure ways to student loan repayments, next they'll have to wash your car and change your diapers too! Where does it end?!?!?! (Sorry, it's been a long morning :)”
Thanks to everyone who participated in our weekly NAPA-Net Reader Poll!