One thing that is unknown is the long-term cost of product, which depends in part on utilization and whether lower balance participants stay in the product for a long time. The sponsor should ask if it wants to adopt the long-term liability associated with retirement income products, and whether it’s ready to be a fiduciary when participants pass age 65.
According to Senderowitz, a recent study of participants showed they most want advice on retirement and how to make savings last and products to help them do this. Sponsors need to respond because boomers are going to be very vocal on what they want and what they get.
John A. Pickett, SVP, Financial Advisor, CAPTRUST Financial Advisors, said sponsors need to recognize there is a need for retirement income products. Plan communications previously only focused on how participants can accumulate savings, but now communications should help participants see their retirement plan as a source of retirement income.
But, ready or not, it’s coming; Pickett pointed out that the Treasury is working on guidance for sponsors on retirement income products. Sponsors need to talk about it and document that they’re talking about it.
Panel moderator Nevin Adams, Editor-in-Chief, PLANSPONSOR, said some studies have shown that the number one reason sponsors said they don’t have a retirement income product in their plans is participants aren’t asking for it. But, Srinivas Reddy, SVP, Institutional Income, Prudential Retirement, pointed out that it’s not that participants don’t want a retirement income solution, it’s that most don’t know they have a problem.
Senderowitz added that it is not common for participants to ask for certain plan features – no one asked for target date funds – but they want options.
Sponsors also cite concerns over fiduciary liability, long-term costs, and insurance company risks. According to Reddy, what sponsors don’t realize is that products now are separate account products not held in general accounts of insurance company. Risk still comes from the insurer going bankrupt but also from participants using up all of their accounts, which can happen, but is not likely.
Chip Castille, Managing Director, Head of BlackRock US & Defined Contribution Business points out that if a sponsor chooses not to do anything because of concern over fiduciary liability, it needs to realize it may also get sued for doing nothing.Senderowitz said sponsors should at least have a discussion at the committee level, and if they don’t adopt a retirement income solution, document why. There is a danger in waiting for better products to come along in the form of the cost of waiting to millions ready to retire in the next ten years.
Selecting a Retirement Income Product
Castille said when considering retirement income products, sponsors should look at the insurance the sponsor is buying represents a fair value to participants. Also look for the product’s ability to provide inflation protection in retirement and whether it can be easily communicated to participants.
Castille also advises sponsors to consider what they’re trying to ensure, i.e. risk against markets, longevity; One type of product will have different pricing than another.
According to Pickett, before deciding what type of product to adopt, sponsors should look at their workforce. Participants’ average salary and average account balance can have implications on uptake of the product and long-term plan cost. Retirement income may be more imperative for older workers, but sponsors should still consider starting something for younger workers.
Senderowitz noted that the size of the plan and the platform it’s using can determine the availability of retirement income options. Offerings from the current provider to large plans may be good enough. However, smaller plans might not have options from their current providers, so the only choice would be to move the plan to another provider.
Reddy added that a single insurer is best the smaller the plan sponsor or less complexity participants desire. Offering more products may offer some security against fiduciary liability, but sponsors should realize that each provider does not backup the others.Audio of the conference panels will be available at https://si-interactive.s3.amazonaws.com/prod/plansponsor-com/wp-content/uploads/2017/05/25041240/Multimedia.aspx_.jpg.
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