July 23, 2012 (PLANSPONSOR.com) – Last week, I asked NewsDash readers if offering a retirement income option as an investment choice for defined contribution plan participants is a good idea.
The biggest percentage (48%) of responding readers said yes, if certain concerns were worked out first. Twenty-six percent said it depends on the plan and participant demographics. Twelve percent chose the response “yes, definitely,” and 14% chose “no, not at all.”
The biggest concern about offering retirement income options in DC plans selected by respondents was “participants won’t understand it” (61%). This was followed by “it would require additional recordkeeping technology and could drive up costs” (55%) and it would create additional administrative burdens for employers” (53%). Forty-nine percent of readers agreed “it would create additional liability for employers,” and 22% chose “participants won’t use it.”
“Other” responses included:
- Could be hard to switch vendors
- additional restrictions/fees to participants
- Also concerned about future of some of the insurance companies that may be offering them, and if we have an obligation to go out to bid every few years, what would happen to the assets in these options at that time?
- although there may be additional administrative burdens and cost the whole point of the retirement plan is to provide a sustainable income at retirement
- These options are a very expensive way of trying to get back to a DB plan.
- Product would need to be completely portable to maintain adequate flexibility for plan sponsors and participants.
- creates higher fiduciary liability
- stuck with provider's guaranteed product and can't shop around for better solution at retirement.
- You can't lock up participants and jeopardize a fiduciary's ability to make changes
- It would take leadership to make sure employees receive a monthly retirement check for life similar to prior generations.
- too expensive for participants
- portability, long-term viability of insurance companies
- participants will sue when things don't work out...
Comments about retirement income options in DC plans expressed similar ideas as the “other” responses to the question about concerns, such as long-term viability of insurers, restrictions on participants, providing portability, and expenses to participants. Several respondents noted the irony of DC plans trying to be more like defined benefit (DB) plans now. On that note, my favorite verbatim comment was: “It's ironic that that move from traditional DB plans to DC plans has somewhat come full circle by offering a retirement income option. A lot of time, money and hassle could have been saved if traditional DB plans could have been improved to equitably share the liability between the employer and employee. A hard lesson learned.”