In its paper the group notes that the private market is responding to the changing retirement income landscape and fears of outliving retirement savings by developing new lifetime income products. However, the group says these products will have varying success at matching consumers’ preferences and need, and they may only reach a select group of consumers.
The Retirement Security Project proposes establishing a default trial income arrangement within 401(k)-type retirement plans in which workers would have a substantial portion of their retirement assets directed into the vehicle unless they choose to opt out. According to the paper, under the default, each retiree would receive twenty-four consecutive monthly payments, after which the retiree could opt for any distribution option under the plan.
If the retiree made no selection of a different distribution option at the end of the trial period, the payments would automatically convert to a permanent income payment program. Under its proposal, the group said, plan sponsors would be encouraged to offer the trial income program and would have discretion over some of its structure and implementation.
The group highlighted several benefits of its plan:
- Adding “automatic” (default) features to 401(k)s allows inertia to work in favor of lifetime income, as it has done in increasing 401(k) participation rates and contribution levels.
- The trial income arrangement would provide valuable information to consumers about income solutions, giving them a tool to appropriately evaluate their distribution options to ensure a more secure retirement.
- Launching a trial income program through 401(k)-type plans, which have millions of participants, has the potential to mitigate the adverse selection problem in lifetime income contracts and to lower prices.
- The trial program initially would provide income for a limited time, and workers who preferred to direct their own retirement assets or take distributions in other forms could opt out if they so chose.
The group concedes that, for such a strategy to work and be sustainable, there were certain issues still to be resolved and certain structures to be established. It said the aim of the paper is to lay out the issues and begin a dialogue that hopefully would lead to a strategy for improved retirement income.
The paper detailing the group’s proposal is here .