PLANSPONSOR Roadmap: ‘Want’ vs. ‘Use’

Plan sponsors have an opportunity to close the gap between what retirement plan participants “want” and “use” to turn their retirement savings into income in retirement, according to speakers in the first session of the four-part PLANSPONSOR Roadmap Series on Retirement Income, held October 8. Speakers shared what features and communications could drive increases in retirement income products’ adoption and use.

The Protection of Lifetime Income

Barbara Delaney, principal for StoneStreet Renaissance, a member firm of Global Retirement Partners LLC, and moderator of the session, told attendees she was thankful her father had a pension when he started making questionable choices behind the wheel. For her, that was the first sign of the former New York City police officer’s cognitive impairment.

“Imagine him making [investment] decisions if he didn’t have his pension, which most Americans do not,” Delaney said. “This discussion really needs to look at what happens to Americans as they decline.”

It is estimated that a firm with a client base with a median age of 75 would have almost one-third of its assets held by clients suffering from cognitive impairment, according to the Retirement Income Institute. The figure rises to 36.7% when it includes all the firm’s clients older than age 65.

While the proportion of the U.S. workforce that has a defined benefit plan is declining, guaranteed retirement income – which can protect workers from poor or erratic decisions as they age — can come in other forms, in order to protect an aging population, Delaney says.

Dispelling Myths

Kevin Crain, the executive director of the Institutional Retirement Income Council, dispels the myth that an in-plan retirement income offering needs to be an annuity. Retirement income can come through systematic withdrawals, hybrid target-date funds, managed accounts with an annuity and partial withdrawals, among other plan features, he said.

Given almost half the money that left retirement plans last year went to annuities—more than $400 billion out of approximately $ 900 billion—Jeff Cullen, CEO of Strategic Retirement Partners LLC, said it is incorrect to think people do not want retirement income products.

There has been an “evolution” of retirement income solutions, according to Crain, and while primarily “mega plans” have been the ones adopting products, other plans will likely do so over time.

Crain added that in some cases, plan sponsors want to see legislative policy, clarity and protections before they implement retirement income solutions. He pointed to the Department of Labor’s decision on September 23 that AllianceBernstein L.P.’s Lifetime Income Strategy can be classified as a qualified default investment alternative under the Employee Retirement Income Security Act as something that could provide clarity and confidence among sponsors. The DOL’s classification enables plan participants to be automatically enrolled in the guaranteed-income investment strategy.

While plan sponsors remain responsible for prudently selecting and monitoring AB as an investment manager, the DOL opinion clarified that plan sponsors would not be liable for AB’s actions if those duties are discharged properly, except in cases of co-fiduciary liability. Crain said this could encourage plan sponsors to adopt retirement income products without fear of litigation.

It is a “misconception” that people are not asking for retirement income products, according to Chuck Williams, CEO at Finspire, a corporate retirement plan consultancy. Williams said employees might not know the offerings are available, even when their employer provides them.

The Good, the Bad, and What to Do

Amelia Dunlap, vice president of retirement solutions marketing at Nationwide, said her company found the proportion of people who say they want lifetime income and protection against market volatility exceeds the share that seeks high earnings with stable returns. She has seen less individual adoption of retirement income products by participants than adoption through managed accounts or dynamic default solutions.

Dunlap said it is “positive” that participants are willing to pay additional costs and fees associated with guaranteed income products, but there is a limit on what participants are willing to pay.

While Dunlap said she thinks thought participants are feeling more confident in their retirement savings, that confidence was not necessarily translating into the “right behaviors.” She suggested participants may want to make decisions to add retirement income early in life, before they risk experiencing cognitive decline.

According to Finspire’s Williams, an in-depth, multimedia outreach is the best way to educate employees on the products their offered in their employers’ plan. He recommended plan sponsors start out by providing general education on the offerings and on the topic of sequence of return risk, then offer financial planning resources to employees on a “continuous” basis.

Williams said when plan sponsors consider adding retirement income to a plan investment menu, they should not only consider their plan design but work with an adviser on the best investment choices, based on the population of their plan.

Strategic Retirement Partners’ Cullen said plan participants, in a recent DCIIA survey, said they care about 1) having lower volatility on their investments as they enter into retirement; 2) not running out of money in retirement.

“Nothing else was statistically significant enough to say they cared,” Cullen said.