A new whitepaper lays out some of the considerations, complications and case studies about offering retirement income solutions.
The paper by the Defined Contribution Institutional Investment Association (DCIIA), notes that, among the plan sponsor motivations to consider a retirement income solution are:
- Supporting participant retirement outcomes and transition to retirement
- Workforce management, including attracting new talent, and rewarding long-term workers
- Meeting other corporate goals, such as retaining assets in the plan
The paper also outlines the various risks that threaten the sustainability of retirement income for participants, including:
- Longevity risk
- Market risk
- Return sequence risk
- Inflation risk
- Consumption risks
- Cognitive risks
Regulatory Support
The paper chronicles regulatory support for retirement income options over the past five years, including a guidance package on lifetime income that included proposed regulations on longevity annuities and partial annuitization by plans, requests for information on lifetime income options and an Advance Notice of Proposed Rulemaking to request feedback on how to communicate DC balances as a lifetime income on participant statements, and Field Assistance Bulletin 2015-02 to help clarify for plan fiduciaries how to exercise their duties in selecting and monitoring annuities in plans.
However, the authors of the paper acknowledge that selecting and implementing a retirement income solution is “more complicated than making other changes to plan design.” They suggest that employers must first must address a philosophical question: Where does the plan’s responsibility for retirement income end, and where does the participant’s responsibility begin?
Moreover, they note that a further complication lies in the array of products to choose from, each of which offers a slightly different solution to the problem at hand.
Factors for Plan Sponsors
Some of the factors plan sponsors may need to take into consideration include:
- Fiduciary obligations: the greater complexity of assessing an insurer’s financial health and reviewing or negotiating specific product terms, as well as counterparty risk — the chance that the insurer could become insolvent. The paper notes that DOL’s recent guidance clarifies that plan sponsors may engage a 3(38) investment manager, as defined by ERISA, to evaluate and select insurers and specific products if they do not wish to make this decision on their own.
- Operational and administrative considerations: there’s a big difference between making a retirement income projection tool available versus adopting a guaranteed in-plan solution. The paper notes that for a guaranteed in-plan retirement income solution to be workable, it needs to be portable, both at the plan level (meaning the plan sponsor can switch record keepers or freeze and replace its existing retirement income solution if necessary) and at the participant level (participants can retain their retirement income benefits if they change jobs).
- Communications considerations: while being prepared to communicate clearly with participants is important with all plan features, the paper acknowledges that the complexity of some retirement income solutions “may make that task more of a challenge.”
The paper also profiles plan sponsors that already adopted a variety of retirement income solutions based on their participants’ specific needs, and shows how they implemented solutions appropriate for their organization and participant base.
