The shift from defined benefit (DB) plans to defined contribution (DC) plans means that now two-thirds of private-sector employees have only DC plans, so one of the main concerns they have is outliving their savings, noted Geoff Dietrich, executive vice president, Dietrich & Associates, in a webinar hosted by his firm.
“Employers, employees and even the government are recognizing the need for retirement income,” he said. Dietrich cited an SEI poll that found nearly 84% of plan sponsors are not confident employees will have enough to retire, and 88% feel their business will negatively impacted if people can’t retire.
Plan sponsors adopting retirement income solutions say they did so to support participant outcomes and their transition to retirement, for workforce management, to retain assets in their plans and because more regulatory guidance has been provided.
“While it’s debatable that employers should provide more than plan offers, it is obviously in employers’ best interest that employees are able to retire,” Dietrich said.
Angela Winingham, Western Region sales director for Institutional Income Annuities at MetLife, noted the average American spends approximately 20 years in retirement, “and we know that number is going to increase.” She discussed two products DC plan sponsors may offer in their plans—an immediate annuity and a deferred income annuity—both of which MetLife offers.NEXT: Retirement income options for DC plans
An immediate annuity allows participants to take a portion of their retirement savings and purchase an annuity that will be paid upon retirement. Offering this in a DC plan allows participants to get group pricing, which is cheaper than if they go out and buy an annuity on their own, Winingham said. Participants can purchase an immediate annuity to cover the basic expenses they know they will have, and it frees up other assets for other expenses.
Participants can choose a single life or joint and survivor annuity. They can choose a guaranteed period where if the participant dies within that period, the beneficiary keeps getting payments, or they can choose a certain period. Winingham explains they can get a return of premium guarantee, and can buy inflation protection as a cost of living adjustment to benefit their annual benefit.
She showed an example that a participant with $100,000 in assets, and assuming a 4% return, who takes $600 a month in systematic withdrawals, will run out of assets at age 85. Whereas, if the participant had purchased an annuity with that $100,000, she would get $600 per month for life.
A deferred income annuity, or qualified longevity annuity contract (QLAC), allows income to be deferred to a later age. Winingham noted that guidance issued by the U.S. Treasury allows a participant to purchase a QLAC with the lesser of 25% of his balance or $125,000. The amount used to purchase the QLAC reduces the account balance subject to required minimum distribution rules. The payment start date must begin on or before age 85. Winingham explained that if a participant set the payment start date to age 85, but needed assets sooner, he could change to an earlier start date, but he cannot move the start date to later than age 85.
She noted that a longer deferral period translates into a greater payment amount, and participants can combine a QLAC with a systematic withdrawal strategy. Options are similar to those of an immediate annuity, and both are fixed annuities immune to market downturn, she added.NEXT: Considerations for offering an in-plan annuity
When determining whether to offer an annuity in their DC plans, plan sponsors should consider participant demographics and the goal of the plan, Dietrich said.
Winingham added that it may be helpful to consider maximum flexibility to maximum guarantee—from allowing systematic withdrawals to offering an annuity. She noted there are different products that run along the middle of the spectrum, such as a guaranteed lifetime withdrawal benefit which allows participants to put money aside through the years to create a withdrawal stream in retirement, but she said those are harder for participants to understand and harder to administer than an annuity. “We think plan sponsors should keep it simple,” she said.
There is a fiduciary obligation for plan sponsors to choose a retirement income option that is in the best interest of participants, Dietrich noted. The Department of Labor has issued guidance about annuity selection. “Plan sponsors should use a prudent process and document it, look at fees, the level of guarantee and the ability of the insurer to provide the guarantee. And, they should monitor the investment as do other investment options,” Dietrich said. Plan sponsors can get help from a consultant for selection as well as monitoring.
Adding an annuity option to the plan is similar to adding any new investment to the plan, he added. Plan sponsors will need to amend the plan, notify participants and beneficiaries, modify the summary plan description and election benefit forms, and establish procedures for administration and Form 5500 filing.
“It requires a robust education program, using print, the web, on-site meeting and the call center. If participants don’t understand the options, they won’t use them,”Winingham added.There have already been regulations to address DC plan sponsors’ concerns about adding retirement income products to their plan, and Winingham said she thinks there will be a continuation of that and, in the future, more adoption of retirement income options.