It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective—this week, ahead of some NAPA Summit sessions on the topic—we asked readers where they think we are.
Ironically, to this day only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. So, where do NAPA-Net readers think things stand?
Our first question—“Where are advisors in terms of integrating a focus on Retirement Income in their service model?”—produced the following:
39% - Early phase of starting to educate plan sponsors
21% - Have implemented some Retirement Income solutions for clients
21% - Early stages to build participant guidance resources
12% - Not focusing on at all
8% - Fully integrated focus including participant guidance and solutions
We got a number of comments on this point—here’s a sampling:
I have explained the concept as well as pros and cons. None of my platforms have integrated solutions. All platforms have projected income amounts on the quarterly statements but none have gone further. I (and I expect the industry) have questions about annuities inside 401k plans. What would the M&E costs? What would be the benefit beyond income for life? Would the annuity basically be a single premium annuity? Is there a CDSC on the annuity? How is the advisor paid? Will this be a fixed or variable annuity? If variable, any ESG sub-accounts?
If this is for me I’m all over it.. maybe a polling question but my gut is most advisors are waiting and watching.
As retirement income from the qualified plan is a new concept, I am just introducing the subject to let them know what is coming. I do not want to be an early adopter which might get the client into a program that is hard to get out of when new products, with lower cost come along.
Everyone is still waiting for the government to provide direction.
Problem always comes down to portability.
We’ve been educating plan sponsors on solutions and engagement strategies, and are building out our participant engagement tools for our Financial Coaches to leverage.
Retirement income and regular payment streams are always top of mind since I work with retirees and close to retiring participants on a daily basis. I hope to see more recordkeepers provide in-plan guarantees and annuity-type payment options to help Americans better prepare financially.
Looking for Institutional retirement income options that are priced attractively and have portability.
I have yet to find investment products that fill this need in a 401k format. We focus on income as part of the education process, but are lacking a specific investment solution
While some advisors may be focusing on in-plan retirement income, most are not. Even retirement plan specialists have many other things to focus on. This is typically not a top priority, unless desired by a client.
This is highly dependent on the demographic of our clients. For tech/pharma companies whose average tenure of employees is less than 7 years, the emphasis is on savings behavior and understanding how to aggregate multiple 401(k) (and/or IRA) balances for financial independence. For other clients with older demographics and longer tenure, we have implemented retirement funds with an annuity component. However, the primary objective for these funds is withstanding market down-turns when planning retirement instead of as a plan distribution option. Broadly our clients have very high plan termination risk (due to M&A or bankruptcy) to embrace annuity distribution options from the plan for participants.
So many people have an allergy to annuities that it is still a toxic subject to some.
The retirement income movement is in the phase where we all know there is a need, but do not fully understand all of the options. As sponsors get more comfortable with the options, Advisors will become increasingly more engaged.
I believe advisors are hesitant to seriously look at in-plan retirement income solutions, as the offerings historically made by providers are much more expensive than their retail equivalents with far less flexibility/fewer customizable options (read: riders).
I have found that Retirement Plan Advisors who have historically offered wealth management services have more structured retirement income solutions vs. their peers who have not focused on individual advice.
I work for a record keeper that offers in-plan guarantees, however the plan sponsor I work with has not adopted this into their plan design as of yet. I am hopeful that they will in the very near future. In the meantime, we do have the ability to allow systematic installment payments and I have set this up with participants who decide to take this option. It is not widely used though, in my opinion as the retirement plans are considered supplemental due to the fact that participants are state employees and have state pensions and SSI which make up the majority of their retirement income. With that said, the 457, 401(k), 403(b) and 401(a) plans do make up the difference and help those with lower incomes and less savings in the long run.
Why annuitize at the lowest rates in history and during Accumulation?
Let’s be honest, most sponsors are focused on retaining and attracting employees at the moment, which is a far greater an issue to them. And just like many topics (income, managed accounts, ESG, etc.) it doesn’t mean advisors or sponsors view this as unimportant, but rather reflects the real issues sponsors are facing.
Varies based on advisors but I think it is a range from early phase all the way up to and including have implemented.
From what i have heard, i think it is fair to say that advisors are probably ahead of the curve on this one.
Our plan design always includes periodic payments as a distribution option. The retirement income solutions don’t include annuities or, with interest rates as low as they are, a Fixed Income type of investment. Mostly, leaving their money in a traditional 60/40 allocation or if someone is really nervous, putting a chunk in a Stable Value fund and setting up a monthly distribution straight from the plan.
The solution is rolling over the Plan Assets to IRAs, splitting assets between an annuity IRA and asset managed model IRA.
Been educating plan sponsors for past couple of years. Shifting focus on developing participant engagement resources and building due diligence framework for plan sponsors.
How Do Participants Want Retirement Income?
We then asked, “How do you think retirement plan participants want to receive retirement income from their retirement savings?”—and got the following responses (and an interesting split):
47% - They don’t know
29% - They want to receive regular income, but the start date varies
9% - They aren’t looking to their employer plan to provide regular income
5% - They want to start receiving regular income at about age 65
Here again, we got some interesting perspectives on this question:
I am torn between “They don’t know” and “They want regular income but the start date varies.” With each succeeding generation, we are getting further away from pensions and the pension knowledge. The idea behind retirement income is well and good. It might incentivize folks to save more. And yet, without a discussion of a living wage, how can folks save? Should we be discussing retirement income when young employees face student debt issues?
It’s a process not a product… how to scale personalized solutions will be critical.
Most participants are not focusing on the eventual income stage. So it will take a lot of education to get participants onboard. Older participants may be more attuned to this concept. The younger ones will not likely think about it until they get a bit older.
Likely younger folks or those who are older and think they can invest their own money want a lump sum either as a rollover or otherwise.
Large majority of participants have a very limited understanding of how assets can be turned into income at retirement.
This decision is really driven by retirees’ needs to meet their expenses. Many retirees I talk to don’t need to take out their retirement savings until RMDs are required because they have adequate retirement income. However, there are always some retirees who have very limited savings and income and need to take distributions earlier than anticipated, especially with inflation taking a toll on their wallets now.
Limited access to planning makes it difficult for participants to know when/how they should take action.
The issue is not the income stream. The issue is whether the income stream is sufficient and plan participants thinking that the company will make up the gap.
I don’t get the sense they’ve thought about it yet. Not sure they view this otherwise accumulation plan and an annuity solution
Looking ahead is not in the minds of many participants. A stunning number of people don’t even have a will or trust. Whatever holds one back from planning for the end game is in place here. Perhaps people feel scared of making wrong decisions, so they make none.
Plan participants still see the 401(k) as an asset instead of an income stream. We have to work to change that view.
The want guarantees without giving up market growth. This is why the GLWB products seem to have the most market appeal.
I believe participants want a process that’s what is easiest for them and something that they will understand, irrespective of their financial acumen. If they work with an advisor, it comes down to the adage of people wanting to work with experienced professionals they like and trust.
The participants I’ve talked to over the past year, have indicated they would like regular income at some point after retiring but it really just depends on their individual financial situation. There is no set standard because everyone has different needs and timeframes. Some, for example may need to start taking regular income soon after retiring if they are younger than the age limit for SSI. Others wait until they have to take RMDs out and some never even want to take the distributions due to their taxable income. One thing is for certain, it is a mixed bag of sorts.
The biggest issue is how they start to receive that income. Is it paid in the form of an annuity, a minimum withdrawal benefit, an installment payment from their account balance, etc.
The clients look to us as their advisors to help them determine this upon our planning advice.
Close to zero plan participants understand annuity and other retirement income options, largely due to their complexity. Even in 403(b) plans where annuities are dominant, the vast majority of participants take a lump sum at retirement, leave their funds on deposit, or take another non-annuity form of distribution. This is regardless of the fact that most have already paid for an annuity benefit!
Most want some type of regular income with the flexibility for distributions outside that regular income stream should something come up and they wish to take additional money out.
Want regular income, not necessarily insured income.
Participants need guidance. Even if they think they know, they can benefit from personalized guidance on all considerations and trade off decisions
Sponsor Perspectives About Participants
Finally, we asked what readers thought plan sponsors believe represents the top priority for employees in regards to retirement income solutions—here’s what they said:
46% - Ensuring individuals don’t run out of money
25% - Maximizing real income for individuals during their lifetime
21% - Ensuring regular income payments regardless of market activity/volatility
8% - Ensuring that individuals principal is preserved
I would think plan sponsors want terminated employees off their books ASAP. Having regular income payments (provided by a non-401k provider) would be helpful. Less helpful would be having the employees stay in the plan and receive said payments.
My opinion is people want to maintain their lifestyle in retirement, so maximizing income would be their objective.
I think Plan sponsors look at the big picture instead of what participants consider their top retirement income concerns. Despite the differences, there are solutions available from some recordkeepers, but more education for both parties need to be provided from our industry leaders.
Plan Sponsors are auto enrolling auto escalating to increase deferrals and still participants fall short with regard to replacement income Moving the dial is very important for the ret industry.
Do not think they are spending much time thinking about it?
None of the above. The 401(k) is a retirement savings tool first. Second priority is financial literacy training.
Plan sponsors seem to think that maximizing retirement income for life is the goal for their plan, however when you talk to participants who really end up taking distributions regularly they have a different perspective in my opinion. The average retiree who ends up living on their pensions and SSI, will often need to dip into their retirement plans to make large purchases (i.e. buy a new vehicle, pay for a vacation, help a family member or pay for unexpected expenses like major medical bills). These employees usually will drain their retirement plans because they did not have a plan in place to begin with and did not seek assistance with financial counseling before retirement began.
Basic retirement planning principle: income over lifetime. It’s not their job to ENSURE they don’t run out of money.
This is the choice that sounds the most like “acting in the best interest of participants and beneficiaries” to me. And most sponsors are focused on accumulation rather than decumulation.
I don’t think this topic is even in a plan sponsors mind until it is brought up to them by an advisor, if the advisor even brings it up.
Regardless of what Plan sponsors believe to be the top priority, the fact remains, each individual has unique priorities and considerations for generating suitable retirement income strategies
Thanks to everyone who participated in this NAPA-Net Reader Radar poll—looking forward to seeing many of you at the NAPA 401(k) Summit on Sunday—and you WON’T want to miss our workshop on how to add a decumulation focus to your accumulation focus—and Sunday’s General Session focused on behavioral economics and retirement income! Can’t make it to Tampa? Virtual option available at https://napasummit.org/virtual-option/.
