“Employers, employees and even the government are recognizing the need for retirement income,” says Geoff Dietrich, executive vice president, Dietrich & Associates in Philadelphia. He cites an SEI poll that found nearly 84% of plan sponsors lack confidence that employees will have enough to retire on and that 88% feel their business will be negatively affected if people cannot afford to leave their jobs.
Plan sponsors that have adopted retirement income solutions said this was to support participants’ outcomes and their transition to retirement; to aid with work force management; to retain assets in their plans; and to benefit from the improved regulatory guidance.
According to Angela Winingham, western region sales director for institutional income annuities at MetLife in St. Louis, the average American spends approximately 20 years in retirement, “and we know that number is going to increase.” She points to two products that defined contribution (DC) plan sponsors could include in their plans—an immediate annuity and a deferred income annuity—both of which MetLife offers.
With an immediate annuity, participants invest a portion of their retirement savings in the product, which pays out on the holder’s retirement. Offering this in a DC plan allows participants to get group pricing—cheaper than if they had to buy an annuity on their own, Winingham says.
A deferred income annuity, or qualified longevity annuity contract (QLAC), allows income to be deferred to a later age. Winingham notes that guidance issued by the U.S. Treasury allows a participant to purchase a QLAC with the lesser of 25% of his balance or $125,000. The amount used for the purchase reduces the account balance subject to required minimum distribution rules. The payment start date must begin on or before age 85. She explains that if a participant sets the payment start date to 85 but needs assets sooner, he may move up the date, but he may not push it beyond 85.
A longer deferral period translates into a greater payment amount, she observes, adding that participants may combine a QLAC with a systematic withdrawal strategy. Options are similar to those of an immediate annuity, and both are fixed annuities immune to market downturn, she says.
When determining whether to offer an annuity in their DC plans, sponsors should consider participant demographics and the goal of the plan, Dietrich says.
According to Winingham, it may be helpful to think in terms of maximum flexibility vs. maximum guarantee when considering whether to allow systematic withdrawals or offer an annuity. She says some products run along the middle of the spectrum such as a guaranteed lifetime withdrawal benefit, which allows participants to put money aside through the years to create a withdrawal stream in retirement. But those are harder for participants to understand—and for sponsors to administer—than an annuity, she says. “We think plan sponsors should keep it simple.”
Whatever type of retirement income product they choose, plan sponsors have a fiduciary obligation to select one that is in the best interest of participants, Dietrich points out, advising that the Department of Labor (DOL) has issued guidance about annuity selection. “Plan sponsors should use a prudent process and document it, look at fees, the level of guarantee and the ability of the insurer to provide the guarantee. And they should monitor the investment as they do other investment options,” he says. Plan sponsors can get help from a consultant for selection as well as monitoring.
Adding an annuity option to the plan is similar to adding any new investment, he says. Plan sponsors will need to amend the plan, notify participants and beneficiaries, modify the summary plan description (SPD) and election benefit forms, and establish procedures for administration and Form 5500 filing.
“It requires a robust educational program, using print, the Web, on-site meetings and the call center,” says Winingham. “If participants don’t understand the options, they won’t use them."
Participants Slow to Use Lifetime Income Solutions
61% of plan sponsors said 25% or less of their participants use in-plan managed account services with a nonguaranteed payout service
50% of plan sponsors said 25% or less of their participants use lifetime income education
50% of plan sponsors said 25% or less of their participants use partial or systematic withdrawals