July 17, 2012 (PLANSPONSOR.com) - Often overlooked by plan sponsors, retirement income options in defined contribution (DC) plans can prevent participants who rely on an average life expectancy in their planning from outliving their retirement savings.
“The problem with averages is it’s okay if you’re the Average Joe or less than the Average Joe in the situation, but if you live too long or longer than planned, and you run out of money, that’s not a good position to be in,” Srinivas D. Reddy, senior vice president, Institutional Income at Prudential, told PLANSPONSOR.
To ensure retirees can match their income with expenses, retirement income options allow participants to think in monthly terms. In this sense, they resemble defined benefit (DB) plans – “old school pensions” – that many companies can no longer afford, said Jason Chepenik, a managing partner of Chepenik Financial. They can, in fact, save plan sponsors money.
Reddy said that participants who do not save adequately for retirement might work longer. With older employees on the books, companies will face expensive payroll and health care expenses.
This raises the question: why are plan sponsors not offering these options?