PLANSPONSOR Roadmap: ‘Want’ vs. ‘Use’

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

The Protection of Lifetime Income

Barbara Delaney, principal for StoneStreet Renaissance, a member firm of Global Retirement Partners LLC, and session moderator, 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 shrinking, guaranteed retirement income – which can protect workers from making poor or erratic decisions as they age — can come in other forms, Delaney says.

Dispelling Myths

Kevin Crain, executive director of the Institutional Retirement Income Council, dispels the myth that an in-plan retirement income offering needs to be an annuity: Other possibilities include systematic withdrawals, hybrid target-date funds, managed accounts with an annuity and partial withdrawals.

Income solutions have evolved, Crain said, and while “mega plans” have been the products’ main adopters, other plans will likely follow suit.

Some plan sponsors want to see legislative policy, clarity and protections before implementing an income solution, he added, noting they might find reassurance in the Department of Labor’s decision on September 23 that AllianceBernstein L.P.’s Lifetime Income Strategy may be classified as a qualified default investment alternative under the Employee Retirement Income Security Act. 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, if they discharge those duties properly, 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 addresses sponsors’ significant fear of litigation.

It is a “misconception” that people are not asking for retirement income products, according to Chuck Williams, CEO of Finspire, a corporate retirement plan consultancy. He said employees sometimes even are unaware that their employer provides them. 

Jeff Cullen, CEO of Strategic Retirement Partners LLC pointed to some recent uptake of the products, observing that almost half the money that left retirement plans last year went to annuities—more than $400 billion out of approximately $900 billion.

The Good, the Bad, and What to Do

Amelia Dunlap, vice president of retirement solutions marketing at Nationwide, said her company found that more people say they want lifetime income and protection against market volatility than seek high earnings with stable returns. She said she also sees more adoption through managed accounts or dynamic default solutions than participant adoption of an individual product.

Dunlap said it is “positive” that participants are willing to pay the additional costs and fees associated with guaranteed income products – but willingness does have a limit.

While she thinks participants feel more confident in their retirement saving, that confidence does not necessarily translate into the “right behaviors.” She suggested participants consider adding retirement income while young, before they risk cognitive decline.

For plan sponsors that opt to offer the products, Williams recommended performing an in-depth, multimedia outreach to plan participants. First provide general education on the offerings and on sequence-of-return risk, then allow for financial planning resources on a “continuous” basis.

As to plan investment menus, besides plan design, the sponsor should work with its adviser to choose the best investments for its employee population.

Cullen spoke to whatever skepticisms remained, with findings from a recent Defined Contribution Institutional Investment Association survey of plan participants. They overwhelmingly seemed to care about just two things: 1) having lower volatility on their investments when they retire; 2) not running out of money in retirement.

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