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Towers Watson CEO: Trends Don’t Favor Lifetime Income Adoption

While industry pundits (and many advisors) continue to tout the prudence, if not necessity, of retirement plan lifetime income options, current trends don’t appear favorable, according to John Haley, Chief Executive Officer at Towers Watson.

Speaking at a Bipartisan Policy Center event in Washington, D.C. on April 1, Haley noted that, “however positive from a policy standpoint, there is no groundswell of support among employers” for emphasizing lifetime income options. In fact, he noted, not only have employers been moving away from providing annuity benefits for career workers — even in traditional defined benefit pension plans — but that trend is “almost certainly not reversible.”

Haley described the trend as part of a long-term shift by employers away from managing long-term obligations, explaining that in 2014, 23 of the largest 100 DB plan sponsors in the United States took action to reduce pension obligations, with 22 of them offering bulk lump sum offerings to terminated vested participants or retirees, reducing obligations by $9 billion. So far in 2015, three more companies have started the process of transferring some of their liabilities to a third-party insurer, he noted.

On the defined contribution side, Haley noted that take-up rates remain fairly low for lifetime income offerings: Only 12% of DC sponsors offer life-time income distribution options, and looking at those that either hadn’t previously offered a DB plan or have frozen their DB plan, only 9% offer lifetime income options in their DC plan.

Moreover, even when the option is offered to participants, the vast majority of plan sponsors report a take-up rate of 5% or less. For plan sponsors that do not offer lifetime income options in their DC plans, Haley said, lack of participant demand and fiduciary risk were the largest deterrents to providing these retirement distributions vehicles.

Haley noted that the concept of financial well being is gaining more attention from employers, and that the existing Social Security structure provides an opportunity, but workers need mechanisms to take advantage of it. Haley cited examples of individuals deferring taking Social Security until age 70 and annuitizing part of their 401(k) to provide income between age 62 and age 70.  

Video of the presentation from “Making Your 401(k) Last: The Challenge of Lifetime Income in Defined Contribution Retirement Plans” is available here