PD08: A Retirement Income Solution – In or Out of a Plan?

For many plan sponsors, the limits of their obligations and responsibilities for their participants are unclear.

Erik Vander Kolk, Group Publisher at PLANSPONSOR , asked discussion panelists Brian Birmingham, VP of Business Development at AXA Equitable, James Lyday, Senior VP of Distribution at Prudential Retirement, Theresa Malone, Consultant for Blue Prairie Group, and Tom Pittman, Chief Marketing Office for The Newport Group, what they thought about Retirement Income solutions and the costs and benefits associated with offering them within a defined contribution plan or as part of a rollover solution.

The panel was part of PLANSPONSOR’s recent Plan Designs Conference in Chicago.

align=”center”> The Panel Audio File

From an employer perspective, Birmingham said that many companies, even those concerned about costs and liabilities, should want their employees to be prepared for retirement. It is a matter of good policy, he said, to make sure those who leave a firm have had a pleasant experience there and will advocate the firm in the future.

Malone agreed, saying it was good business for plan sponsors to care about and address some of the employees’ needs, but she also believed that it was the right thing to do. She said an important question for companies to consider is whether or not their employees will be able to retire with dignity. It is not good practice, she said, to guide them through the accumulation phase but not do anything to prepare them for distribution.

Birmingham claimed that most plan sponsors are more interested in creating a plan that is both attractive and beneficial to their participants than just doing the bare minimum to fulfill their minimum legal obligations; many participants are not equipped to manage their own accounts and plan sponsors should act on their responsibility to meet their clients’ needs.

Lyday argued in favor of in-plan solutions, saying they helped bypass participant inertia and offered easier access and education opportunities.

Pittman agreed, saying it is better to default people into a good option-while still allowing them to leave if they desired-than to leave them without any kind of preparation and hope they make the right decision. Inadequacies in the plan can be corrected or avoided when the employer is directly involved, said Lyday, but he admitted that the extra costs would prevent in-plan solutions from really being effective until the participants neared retirement.

If these extra costs prevented the participants from thinking about what they would need to do-whether they would withdraw their savings as a lump sum-before they were at least 50 years old, they might not be as well taken care of as they might have been if they had started planning earlier.

Malone advocated participants plan, if not take action, long before retirement, so that when the time came to make a decision the plan sponsors and participants would be well aware of the employees' needs and expectations and what type of solution would work best for them.

Birmingham claimed that rollover solutions allow plan sponsors to identify the participants over the age of 50 and have seminars that present possible solutions. There would be little liability and the seminars would start participants thinking about what they intend to do a few years before they need to decide.

Everyone hopes their retirement date coincides with an up market, said Pittman, but it is possible that it would be a down market, forcing participants to work longer or retire with less than they might have hoped unless they find a way to protect themselves against that possibility.

There are seven major risks that employees will have to face at retirement, said Malone, including longevity as life spans extend, health care costs, solvency risks, savings risks, withdrawal, market volatility, and inflation, which can drastically reduce a participant's savings over a long enough period of time, even if the inflation rate is only 2% or 3%.

Professional financial planning is too expensive for most employees, said Malone; she advocated the development of a standardized option to attend to the majority of participant needs, but there is not yet an agreed upon, universally acceptable solution for these problems.

However, the panelists agreed that good business sense would necessitate plan sponsors' continued involvement with their participants, from enrollment through distribution, if they want to provide the employees with a successful retirement.

-Sara Kelly