Benchmarking Retirement Income is More Than ‘Checking a Box’

The adoption of retirement income within defined-contribution plans may not yet be widespread. But once a plan sponsor decides on a retirement income offering , it also commits to benchmarking it.

“It is a settlor decision to offer a retirement income solution and a fiduciary process to evaluate, select and essentially oversee that option,” says Kathleen Kelly, president of retirement and wealth for the Mid-Atlantic region at Marsh Agency.

Rob Massa, managing director and Houston market retirement practice leader at Prime Capital Investment Advisors, says benchmarking target-date funds at baseline—without retirement income options embedded—can be difficult, as each choice embodies a different glide path and risk profile.

“Now you add income into the mix [of the fund], and you’ve added a whole new layer” of fiduciary considerations, Massa says. Sponsors should ask themselves, “Why are we offering retirement income, what are we trying to achieve, and how do we want to fulfill that?”

Starting With Suitability

Finding a product solution starts with understanding which plan choices are the most suitable for the sponsor’s employee universe. Janjaap Weeda, a product manager leading CEM Benchmarking’s investment benchmarking practice, says sponsors at the outset should think about the role of the retirement income option in participants’ broader retirement savings picture. In other words, a sponsor should consider whether the product is supplemental to a defined-benefit plan or if it will be participants’ primary option to generate income.

Weeda says CEM’s research has shown that retirement income adoption is lower in public sector defined-contribution plans than in corporate DC plans, which he attributes to there being more open public than open private DB plans that provide retirement income.

Massa says that a sponsor’s first benchmark should be “setting the goal of what the benchmark should be and figuring out a path to achieve that.”

Employers also should understand their demographics, including how many of their participants are “on track” for retirement—while also deciding how they define that measure, Massa says. He cautions plan sponsors not to take a recordkeeper’s definition of “on track” as “gospel,” as it may not align with the sponsor’s understanding or goals for retirement readiness. A sponsor may be wise to consider whether participants are on track given their age, income and biological sex—which can be a predictor of longevity—Massa says.

Doing this analysis helps a sponsor determine which products are suitable for its participant population, Massa says. While determining suitability is not a fiduciary practice, it “at least takes the marketplace from a pumpkin to an apple,” he says, in reference to narrowing down the breadth of options available.

“Benchmarking should not be [determining] whether a plan has simply checked the box by adding an income option,” Kelly says. “It has to also be [about] whether participants can understand [the product], whether they can access it and whether they actually use it to create income that aligns with their retirement needs.”

Like Massa, Kelly says that understanding plan demographics at the outset of the benchmarking process is crucial. She says advisers can also educate plan sponsors about whether retirement income is right for their organization, given data about plan participants and surveys about participant needs.

Understanding Products, Checking Availability

The next step Massa says sponsors should take is to understand the differences among products, while also choosing how to “fulfill the income concept.”

Massa says that, while surveys have shown that both employers and employees have significant interest in guaranteed income, he questions whether employees know what the term means. Participant education, he says, will be crucial to the success of a retirement income offering.

Kelly concurs. “We should not expect participants to solve a highly complex problem simply because we give them a brochure or website,” she cautions. “Participants want to know what time it is; they don’t want to know how to build the clock.”

Massa says sponsors must subsequently check which products their recordkeepers can make available. If all that is available is the recordkeeper’s proprietary product, he recommends that a sponsor not choose to provide it, at least until the recordkeeper makes more options available. Among the potential problems: A proprietary solution may present portability issues, should a sponsor choose to change recordkeepers, or if a participant changes plans or employers.

Benchmarking and the DOL Investment Rule

Alex Curcio, a consultant at benefits advisory firm Curcio Webb, says the Department of Labor’s proposed rule for prudent investment selection—which includes benchmarking as one of six factors for fiduciaries to consider when making investment selections—is relatively lenient, but not necessarily sufficient for plan sponsors.

A safe harbor is “not a substitute for due diligence, but it can help address a specific fiduciary concern,” Kelly says, echoing  the point Curcio was making.

Curcio says that to fall within the DOL’s proposed safe harbor, fiduciaries would be essentially required to seek insurance providers’ attestations of solvency but not to compare crediting and payout rates. Despite this, Curcio says he has encouraged his clients to go directly to insurance companies themselves to ask for rates.

Sponsors “want to understand: if [they] offer the product and pay for it, will [employees] use it?” Massa says. “ERISA is very clear. When participants pay the fees, a service must be both reasonable and necessary.”

Curcio says that plan sponsors should be sure to check the fees their recordkeeper is charging and the way they apply because there can be great disparity in how fees are charged. For example, a recordkeeper could charge a flat fee or a percentage of assets for a retirement income product based on the amount of money a participant decides to annuitize. While there is no “right or wrong answer” as to what should be charged, Curcio says, it is important for plan sponsors to recognize that and negotiate fees as much as possible.

As for other factors to benchmark, Massa says sponsors should conduct recurring evaluations of the underlying creditworthiness of the insurers guaranteeing any products offered. Sponsors should also look at the performance and liquidity of the product at both the participant and plan levels.

Kelly says plan investment committees should evaluate the strength and terms of any products’ guarantees and whether the chosen solution continues to serve the best interests of participants over time.

“It’s very important to remember that retirement income benchmarking is not a one-time exercise,” Kelly says. “Products, providers, regulations, plan demographics and platform capabilities are changing constantly.”

As for benchmarking frequency, Massa says that while standards have not yet been “coined,” he recommends sponsors do it at least every three years.

Weeda says he recommends reviewing providers’ credit ratings, as well as the transparency of fee disclosures, on an annual basis. He also says sponsors would be wise to document all benchmarking efforts . Another best practice, he says, is to go out to market with a request for proposals or a request for information every three-to-five years.

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