Feature | Published in July 2012

You Can’t Always Get What You Want

The retirement income option is all the buzz … but good luck finding a recordkeeper to agree to it

By Corie Russell | July 2012
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Illustration by Don Kilpatrick

As traditional, defined benefit (DB) pension plans become less prevalent in the workplace, retirement income options in 401(k) plans are gaining traction because of their ability to help individuals secure a steady stream of income from their net retirement savings.

According to BlackRock’s 2012 Annual Retirement Survey, 88% of plan participants would like a steady income stream at retirement, versus 12% who prefer a lump sum. Plan sponsors also recognize this need, with 81% agreeing that participants prefer a steady income stream. But what happens when a plan sponsor looks for a retirement income option that a recordkeeper will not host?

Jason Chepenik, managing partner of Chepenik Financial, discovered this firsthand when, about a year ago, one of his clients decided to add a retirement income option to its near-$350-million-in-asset 401(k) plan. Chepenik describes the midsized technology company’s plan as the “design we all hope to achieve.” Automatic enrollment is 6% with a match, dollar-for-dollar, up to 6%. The firm started this 13 years ago—a move that, Chepenik says, was “extremely progressive at the time.”

Today, the company has more than 90% 401(k) participation, with the average balance of each plan participant at approximately $175,000. Despite this success—or perhaps because of it—the plan sponsor recognized the need for employees to have financial security not only to get to retirement but also to get through it, Chepenik says.

David Roberts, benefits manager for the California-based company requesting the retirement income option, says he believes it could help participants secure another source of monthly income besides Social Security to help meet their basic needs. A retirement income option would achieve this while allowing participants to “set it and forget it,” he adds.

“We feel that it’s important because the vast majority of our employees prefer the hands-off approach to investments,” Roberts says. “We definitely understand the value of what a defined benefit plan provided historically, and we’re trying to capture that value within our 401(k) plan. [A retirement income solution] helps with retirement readiness. If someone is approaching retirement and sees that they can ultimately receive X amount of dollars on a monthly basis, they know they can meet their basic needs when they retire.”

In an interview with PLANSPONSOR, Chepenik and Roberts describe the ongoing struggle to make this retirement income option available for plan participants.