This was the contention of Steve Smith, VP, Sales & Corporate Plans Market Leader, Diversified Investment Advisors, a member of a panel at the PLANSPONSOR National Conference discussing five things sponsors need to know about retirement income.
Start with knowing why you need a retirement income solution.
Jason Chepenik, Managing Partner, Chepenik Financial, pointed out that overwhelmingly participants are not engaged. One can look at the success of target-date funds and auto enrollment and it naturally follows that participants would want sponsors to “auto” them out of the plan. Sponsors should change the focus from the account balance participants need to end up with and help them calculate what will be needed on monthly basis. “This is the DBization of the DC plan, a good concept,” Chepenik said.
Jody Strakosch, National Director, Retirement Products, MetLife U.S. Business, added that lump sums are not in the best interest of participants. Research shows that six in ten live paycheck to paycheck, and 40% couldn’t live for a month if they lose their paycheck, so how are they expected to turn a lump sum into an income stream.
Sponsors need an income policy statement.
Mark N. Fortier, Head-Product & Partner Strategy, AllianceBernstein Defined Contribution Investments, notes that an income policy statement is not the same as an investment policy statement. An income policy statement details the goals of the plan and behavior of participants and discusses how to marry plan design with investment menu and income needs.
According to Chepenik, when developing an income policy statement, retirement committees talk about an income goal for participants (x% of salary) and look at plan data to see if they are on track to reach that goal. They change plan design and investment mix as necessary.
Smith notes that DB plans used benefit formulas to replace x amount of income, so this is not conceptually different from that approach.
Strakosch adds that an income policy statement uses plan design to create better outcomes for participants. Sponsors decide whether they want to use a Qualified Default Investment Alternate (QDIA) with a retirement income component, use a retirement income product, or maybe take better control of company match contributions and invest them in a retirement income solution.
You may need to influence your recordkeeper.
According to Smith, it’s not about providerws selling a product, it’s about sponsors developing an income policy that drives the need for a product that should be built to provide the best solution to employees. If sponsors design the product and tell their providers this is what we need, it will be done.Chepenik adds that some recordkeepers are apprehensive to offer a suite of retirement income products because they are waiting for demand. There are good products that recordkeepers are not hosting yet because there is not enough demand in the market, so sponsors need to ask for it.
The hurdles are not as high as you might think.
Smith contends that the decision to adopt a retirement income solution requires no more than any other investment decision. Some investment decisions may be more difficult than others, but deciding on retirement income is similar to deciding to use a stable value fund. He also suggests that if sponsors tell providers about the supposed “hurdle”, the market will come up with a product to meet that need.
According to Fortier, the issue is inflexibility, past products have been hard to get out of if sposnors change their minds, but there are newer, flexible solutions.
Strakosch adds that if sponsors choose a retirement income solution and phrase it right to participants, not as an all or nothing solution, but a partial annuitization of retirement accounts, there will be a good take up rate.
Sponsors need to help employees help themselves.
According to Strakosch, the easiest way to help participants help themselves is to display their retirement accounts as a retirement income stream. It is a way to get participants to start changing their mindset. Employers need to realize they are really a trusted resource to participants.
Smith says sponsors should tell employees what they need to save, don’t let them decide because they don’t know.
Chepenik adds that sponsors should make sure the folks at the company doing education along with providers are coordinating on the message of retirement income.Audio of the panel discussion will be available at https://s3.amazonaws.com/si-interactive/prod/plansponsor-com/wp-content/uploads/2017/05/25041240/Multimedia.aspx_.jpg.