Some have said that this could be the year for retirement income—a combination of new offerings, volatile markets, and rising interest rates. This week we asked readers what they thought…
It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective. And yet, surveys—and actual data—suggest that even when participants have the option (and, as noted above, mostly they still don’t)—they don’t take advantage. So, we started with that, asking readers what they thought was behind the slow take-up rate by participants (even when they have the option)—well, the responses were…varied:
68% - They don’t understand the option.
66% - They don’t have the option (or don't recognize it as such).
47% - They're just not thinking about it.
24% - They don’t feel they need the option.
11% - They have other options.
The market is mostly annuities at this point, and annuities have had such a terrible reputation for so long a period of time that engagement is difficult.
Plan sponsors don’t want participants to stay in the Plan post retirement and would rather people roll out. Less people to track down the road!
There is still a concern about allocating a large percentage of their balance to income.
In addition to participants, there is still a challenge for advisors and plan sponsors to understand what is out there ... functionality, costs, portability, etc.
There is an incentive for individual wealth advisors to roll money into IRAs so that they can get paid on individual account management. And if there is a retirement income option in the plan, advisors that do both plan advising and individual wealth advising may not be as enthusiastic because it would lead to less potential income to the advisor.
It is new and complicated.
Perhaps we should pat ourselves on the back to teach people how to build a portfolio that is aligned with their objectives... and those objectives do not currently require the need for retirement income from their 401k plan. This subject matter can be a very different need and story depending on the clients you work with. Many people do have other sources for retirement income and/or do not need to take distributions from their 401k plan.
Retirement income solutions without guarantees really aren't new and aren't what people (sponsors, participants, and advisors) are really looking for when they think about a retirement income solution. However, lifetime income guarantees in DC plans just take a long time to get set up—connectivity, due diligence, advisor/plan education, participant experience/support, setting up/outlining how portability works, etc. It will take time so there won't just be a "year" when it all happens—it will take time so more specifically, this will be the decade or retirement income and specifically, guaranteed retirement income.
TPA's have been reluctant to adopt.
Annuities have a bad reputation; many plan sponsors and employees don't understand them and so are leery of them. Also, not all annuities are the same.
I think it's the fact they don't like the idea of having their money tied up in a vehicle that they may not be able to get it out of.
No one has pushed it.
Many of the legacy solutions are too complex for the participant, sponsor and RPA to understand.
Products and solutions are still not widely available to participants because recordkeepers have not implemented them.
Although there is a need and desire to have an income solution, it is too difficult for participants to understand and many Recordkeepers are not willing to make the large investment needed to offer the option especially because there is not a standard solution that will allow access to many products. Haven't saved enough, unwilling to dedicate/lock up majority of accumulated assets.
Is This the Year?
Of course, some have said that this could be the year for retirement income—a combination of new offerings, volatile markets, and rising interest rates. On this front, respondents were pretty optimistic:
44% - Yep - the stars seem to be aligned.
23% - Too soon to say.
18% - If anything, the uncertainty will preserve the status quo.
10% - Not a chance.
5% - No opinion.
Still a need for much more clarity.
Though there are some state-of-the-art, low cost, fee transparent product, unfortunately they exist beside so much junk that it is going to take a sea change in that marketplace before retirement income becomes anywhere near dominant.
Still not loving the products we're seeing. Feels like it's too early to start incorporating these in plans. We teach people how to build a portfolio for income streams if they need it.
Yes, but more like the decade for retirement income (specifically guaranteed lifetime income) since it will take a long time to get set up.
Recordkeepers are starting to set their strategies to offer solutions
Plan investment fiduciaries continue to be wary of increased risk.
SECURE ‘Steps’
There were three provisions in the SECURE Act intended to expand the awareness and/or take-up of lifetime income options—both in terms of expanding access to these options and increasing participant awareness.
Now, arguably COVID may have delayed adoption or impact of these—but we asked readers to rate these in terms of effectiveness over the longer-term (say five years)?
Cited by a clear plurality to have a “big impact” was the expanded fiduciary safe harbor for the selection of a guaranteed retirement income provider. 46% saw a big impact as a result, 44% saw some impact, and the rest (10%) no impact.
Not far behind was expanded portability—courtesy of its allowance of special distributions of a “lifetime income investment” when the investment is no longer authorized to be held under the plan. Just over 41% thought it might have a big impact, though 49% only say it having “some” impact. The remaining 10% weren’t seeing any impact.
Finally—and the element that just under two-thirds (64%) saw it only having “some” impact (more than a quarter—28%—saw no impact, and just 8% thought it would have a “big” impact was the participant projections of their current account balance as a monthly benefit using assumptions prescribed by the Secretary of Labor.
Recent market downturn & increased economic uncertainty is increasing participant interest.
We believe the fiduciary safe harbor will create awareness, but not actually move the needle for retirement income. Happy to share why.
I'm concerned that the lifetime income disclosure will just become yet another disclosure item that already overwhelmed participants will ignore.
When you say "some" impact, that could be as few as 10 people nationwide. But it is still "some" and more than "no," so that's why I'm saying "some." I don't think it'll be very many, though.
Portability is key and not solved yet.
Lifetime income projections more likely to mislead than to inform.
The projections in particular are an absolute joke, since they assume zero future growth—they are so misleading that many recordkeeper have relegated them to super-fine print in their participant statements.
‘Needle’ Points
But if the SECURE provisions weren’t a “cure all,” we asked readers what they thought WOULD “move the needle (more than one response was permitted):
62% - Options integrated with target-date fund glidepaths.
51% - Less expensive annuity options.
33% - Pre-screened annuity options.
28% - Clear(er) protections for plan fiduciaries in selecting the options (though 13% thought the enhanced fiduciary clarity in the SECURE Act should be sufficient).
15% - Stand-alone annuity purchase options as a distribution choice.
8% - Nothing—this really isn't a plan sponsor/fiduciary responsibility.
Other Comments
We've had accumulation annuities in 403(b) plans for literally decades, yet actually annuitizations in those plans is uncommon, despite that fact that the participant have ALREADY PAID for the annuitization feature! That's how dreadfully unpopular annuities are, so unless we are talking alternatives such as bond ladders, or target-date fund sleeves, we probably need a complete overhaul of the annuity marketplace for retirement income product to become well-utilized in retirement plans.
The other problem is that these retirement income options really need to be part of a bigger strategy. If the participant is working with an advisor, that FA may not be able to advise them on the retirement income strategy within a 401k plan if you are not the advisor on the plan.
In my humble opinion...annuity products are not often looked upon favorable due to their complexities and lack of transparency. Retirement plans are finally getting into the better transparency methods with fee disclosure, benchmarking and removing revenue sharing from investments. Adding a new "product" that historically doesn't do those things is a concern.
They are needed now!
Just takes time so the amount of action to get everything in place is really important and will precede the action of using them. Everyone across the ecosystem needs to have more tools, more education and more integrated access to truly see it take hold.
The time is now for recordkeepers to implement and offer retirement income solutions.
I believe retirement income products do offer some benefits to those who rely solely on their 401(k) to fund their retirement.
I've been talking to plan sponsors for a few years about this. -Grandfather of Retirement Income
We began extensive retirement income discussions w/all clients in spring '21. We purposely gave them 'small bites' to digest along the way & many are now ready to move. Difference in these conversations vs others as directly impacts people on retirement committees. Think key will be advisors willing to do the work, recordkeepers being able to accommodate products & legislation to protect the employer.
We believe it is currently on the cutting edge of benefits, but that it will be table stakes in the future. Sponsors and Advisors generally have limited knowledge of this insurance dominated space, so there needs to be a new wave of collaboration between the distinct stakeholders.
Way back in 1987 I had my first job working with a 401(k) profit sharing plan that allowed participants to purchase in-service annuities. Participants could buy multiple annuities at any time. The annuities remained in the plan until retirement or separation. That plan no longer exists due to a merger. Since that time, I haven't been involved with a defined contribution retirement plan that offered annuities or a lifetime income option. That's 35 years of working with retirement plans.
This is an unpopular opinion, but I'd love to see the workplace retirement system scrapped and everyone fend for themselves on retirement. Then, those of us in the retirement industry could go and do something useful to society (which could include counseling workers now on their own for retirement saving and planning).
Best option is a bridge to defer commencement of Social Security until Full Retirement Age or Age 70.
The industry is slow to move which hurts participants who need help the most. We're working hard to increase communication on decumulation strategies, but we're too focused on past solutions instead of the innovation that has recently came to market.
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