Retirement Income Options Shift Into the Spotlight

With the retirement industry’s increased focus on utilizing retirement income options, speakers at the PLANSPONSOR National Conference discussed how the topic reached front and center and how to optimize guaranteed income offerings for participants.

“In doing a good job of helping employees prepare for retirement and accumulating assets to do that, we sort of put [them into the] backseat [of] the self-driving car,” said Sean Kelly, a vice president and financial adviser at Heffernan Financial. He pointed to automatic enrollment and automatic escalation as self-driving examples. “Then, right at retirement, we yank [participants] out and put them in the front seat and shut off the [autopilot.]”

Kelly added that at the point of retirement, employees likely have the largest pool of money available to them that they have had in their entire lives—which could lead to underspending or overspending.

“The reason we’re talking about this today is that people really need help with [decumulation],” said Elise Thiemann, vice president and head of defined contribution investment strategy at State Street Investment Management. “The problem is: People [often] want personalized, automated help [with it].”

Chuck Williams, CEO of corporate retirement plan consultancy Finspire, said plan sponsors want to help their employees retire, especially to remove older employees with expensive healthcare needs off the sponsor’s balance sheet. But offering retirement income products not only helps the employer; it also helps employees who may need those products. Employers’ mission statements have also become much more employee-centric over time, Williams said.

Ideal Models

State Street’s Thiemann explained that the most important or effective guaranteed income models vary by participant. It is not a guessing game that the employer has to figure out—the participants will express their preferences, she said.

Thiemann predicted that in the future, plans will offer at least three types of retirement income options to meet the needs of different participants. She said the breakdown may happen as follows: one for the “easy button” participant who wants very minimal involvement in selecting the retirement income product for themselves; another for the middle-ground, “help me do it” employee; and a third for the “I’ll do it myself” pre-retiree. Having different solutions appropriate for each of those populations will “release the pressure valve” on plan sponsors deciding which solutions are the best for their employees, Thiemann said.

Evaluating Annuities

In considering an annuity—one type of retirement income offering—for a plan, it can be evaluated based on the six-part evaluation framework offered in the Department of Labor’s proposed rule for selecting investments, said George Sepsakos, a principal in Groom Law Group.

“The proposed rule is written in an investment-agnostic way,” Sepsakos said, explaining that it can apply to selecting all kinds of investments, including private market assets.

The proposal provides a safe harbor that would allow retirement plan fiduciaries to meet their duty of prudence under the Employee Retirement Income Security Act when selecting investments. It would be available to plan fiduciaries that follow “a prudent process” when selecting investments. The DOL’s six-factor test covers the following aspects of investment selection: performance, fees, liquidity, valuation, benchmarking and complexity.

But evaluating an annuity based on some of those factors—such as performance—is not the same as evaluating other kinds of investments, Sepsakos said. As an example, he stated, “You don’t evaluate your homeowner’s insurance policy based on a return on [the] premium.”

Instead, Sepsakos added, a plan sponsor could determine whether the product accomplishes a goal the employer hoped to accomplish.

“‘How effective is [the product] going to be in terms of providing a stream of lifetime income?’” Sepsakos suggested plan sponsors ask during their evaluation processes. “‘How likely is the solution to help [participants] replace a certain level of pre-retirement income?’”

As for fees, Sepsakos said the DOL has made it clear that plan sponsors need not pick the cheapest option when making selections. Rather, they should evaluate whether the cost is commensurate with the value the product provides.

On complexity, Sepsakos said plan sponsors should leverage professional help to deliver any product in a way the plan committee and plan participants can understand.

Matt Gray, a vice president of employer markets at the Allianz Life Insurance Co. of North America, added that plan sponsors can have a more sophisticated retirement income product that addresses the needs of a broad spectrum of participants while simultaneously delivering the experience in a way that is “simple” and “intuitive.” Employers can deliver the solutions by providing participant education and seamless experiences that help facilitate positive outcomes.

“So [complexity] can be simple?” asked Amy Resnick, executive editor of PLANSPONSOR and moderator of the panel, with a laugh.