PSNC 2017: Retirement Income Products and Solutions

At the start of the 2017 PLANSPONSOR National Conference panel on Retirement Income Products and Solutions, Barbara Delaney, principal, StoneStreet Advisor Group, and moderator of the panel, shared a chart showing that the ability to make sound financial decisions starts to decline at age 49 and precipitously declines through age 75. “We need to get people to make retirement income decisions while working,” she stressed.

However, defined contribution (DC) plan sponsors have been slow to adopt guaranteed income products for their plans. John Doyle, senior vice president, defined contribution strategist at American Funds from Capital Group, noted that the concern over fiduciary liability has been the biggest roadblock to adopting retirement income products or solutions. “Plan sponsors say, ‘We’re not supposed to be talking about guaranteed or insured products,’” he said. Plan sponsors are also worried about portability, he added. They worry that the solution will be stuck in the plan and the plan sponsor will be stuck with the recordkeeper. “It could put handcuffs on the plan sponsor and on participants. The solution may be to have out-of-plan options available,” Doyle said.

Marty Menin, director – retirement solutions division at Pacific Life Insurance Co., said another issue is complexity. “If you think of all the different versions of retirement income—guaranteed minimum withdrawal benefits [GMWBs], qualified longevity annuity contracts [QLACs], regular annuities—there are some complex choices, but those of us in the insurance industry are working on these things,” he said. “Plan sponsors have to understand them, then have to teach employees about how they work. As the industry adds solutions and builds them, we imagine all the different things plan sponsors and participants have to understand and communicate.”

Bruce Lanser, senior retirement plan consultant at UBS Retirement Plan Consulting Group, noted that 30% of his firm’s clients have adopted GMWBs as an in-plan solution. “They are aware of the added responsibility and speedbumps such as portability, but they have the view that this is too important,” he said. Lanser explained that a GMWB is something somewhat simple for participants to grasp. Participants in defined benefit (DB) plans didn’t know interest rates and investment allocation, but they knew what they would get in retirement, and this is the same with a GMWB. Participants know they will have a benefit of “x” amount if retire in year “z.”

A plan sponsor in the audience shared that it took a different approach because it didn’t want an investment in the plan. The plan sponsor partnered with Financial Engines to offer its Income Plus product. It is not so much a guarantee, but Financial Engines works with participants on a draw-down rate and the purchase of an annuity at age 80.

Lanser said there once was a concern about keeping participants in a DC plan for 20 or 30 years after leaving employment, but now there is a trend of plan sponsors wanting money to remain in the plan. The plan assets will grow and help in negotiating lower fees. There’s been a changing mindset.

Doyle expects that when the full fiduciary rule goes into effect, more people will stay in the plan whether they want to or not. But he warns that if a participant doesn’t feel he can handle finances in retirement and the employer doesn’t help, he may continue to work longer, which raises health care costs and lowers productivity for employers. “It makes a difference to the bottom line if you can help them retire, and that includes helping them be comfortable with being able to have an income stream in retirement,” he told conference attendees.

If participants keep their assets in the plan, maybe that will be the catalyst for someone to come up with a product for in-plan guaranteed income, Doyle speculated. “If participants stay in the plan, and the plan is designed for accumulation up to age 65, plan sponsors are not doing their fiduciary duty for all participants, i.e., those who are terminated,” he said.

He added, “I don’t think at any time in the near future it will be required to offer guaranteed income in the plan. One reason is the portability issue. Secondly, government mandates have not necessarily been proven to be taken well by employers. We’ve seen that with health care.”

Menin said he is not sure there are any new and creative ideas for retirement income products and solutions, and the retirement plan industry needs new, creative ideas over the next few years. But people fail to understand some options already available. For example, he explained, one fear participants have of annuities is, if they get hit by a bus, they will lose the rest of their annuity. There are options such as a 20-year certain annuity, but no one understands that. “Participants want guaranteed lifetime income, but not annuities, so a gap exists between what people want and what the industry is offering. There is no collaborative effort between industry and individuals,” he said.

The Internal Revenue Service (IRS) has issued regulations allowing for retirement income products to be included in target-date funds (TDFs). “I think if they have guarantees in TDFs, the plan sponsor assumes they are defaulting participants into guarantees,” Doyle said. “Where I see guarantees coming into TDFs is as an option for participants, but we’ve seen that, when something is voluntary, people don’t use it. That is where it is important for advice and education.” He added that managed accounts and packaged products will start to meet people’s needs.

Lanser noted that if plan sponsors default participants to a GMWB 10 years before the end of the TDF end date, it changes behavior. Participants save more in the plan. In addition, he said, research shows participants are 3.5 times more likely to stay in investments during market downturns when they have a guarantee. They don’t do things that would be destructive to their savings.

Doyle advised a change in terminology from “retirement savings plan” to “retirement income plan” to change participants’ mindset.

And Lansing suggested that plan sponsors need details about guarantees and what is backing them, in order to monitor the investments. But with participants, they can simply explain what the product translates into for retirement income.