SURVEY SAYS: Does Your DC Plan Offer a Retirement Income Option?
Two months ago, the Labor Department issued an RFI on the subject (see Feds Call for Lifetime Income Product Public Comment), and over the past several weeks several providers have launched new and/or improved retirement income product designs. This week I asked readers if their defined contribution retirement plan offered a retirement income option – and if not, why not.
Most – but only just over half (52.9%) said they didn’t have those options in place, though 8.2% “weren’t sure”, and another 8% cited “other” (more on that in a minute).
On the other hand, just one-in-five (21.2%) said they had them in place, and if you add in the other one-in-ten (9.4%) who said they didn’t have them in place “yet,” you wind up with a pretty robust representation (relative to most surveys I’ve seen, anyway). Why Not? I asked respondents who didn’t have a retirement income option at present why they didn’t. The responses were, as you might imagine, varied. Bearing in mind that respondents could choose more than one answer, the responses were: A full quarter (25.0%) were just “not sure.”
I also asked readers to pick the PRIMARY reason they had not put a retirement income option in place. For the most part, they echoed the results above:
- 19.6% - no participant demand
- 10.7% - have too many other things to deal with now
- 8.9% - concerns about product complexity
- 7.1% - concerns about cost
- 7.1% - waiting for more clarity from regulators
- 7.1% - just waiting
- 5.4% - waiting to see what new product innovations emerge
- 5.4% - concerns about fiduciary liability
I found it interesting that 16.1% said they “weren’t sure” why they hadn’t adopted the option. Also of interest were the roughly one-in-eight (12.5%) who chose “some other reason,” including the following:
Union leaders not interested at this time.
Owners don't want, so we don't get.
Old dogs & new tricks...chose to use my chits on TDFs and auto enrollment features.
Don't think the market is mature enough
Not an option available to us yet.
Concern about adding Defined Benefit type provisions into our DC plan
Waiting for the right product at the right cost.
Most of this category could probably best be categorized as “no participant interest, however.
Happy Together?
That said, asked if those who had the option in place were happy with it, nearly half (44.4%) said “yes”, and another 16.7% were willing to go so far as to say “very much so!” One of these readers noted, “We started it up in 2007, just before the market started tanking. It was perfect timing. The participants who enrolled up front can see a definite difference in their actual account balance and the calculated 5% return. I wish I were 'of age' so I could enroll.”
Less enthusiastic were the 5.6% who said they were “pretty much” satisfied, while one-in-ten (11.1%) said “not really” (a number of these seemed to be disappointed with the low participant take-up rate). However, no one said they were “not at all” satisfied with the offering.
Among some of the more interesting comments were the following:
"Providing employees the ability to annuitize their DC account so that they can have a lifetime stream of income is an important feature for a DC retirement plan.”
“If a plan sponsor does not provide a way to turn that DC account into lifetime income, then they are really just offering a savings account and not a meaningful retirement plan."
“Concerns about "safest available" annuity provider concept for terminating DB plans being applied to DC plans.”
Our retirement income option is presented by our recordkeeper in a manner that encourages people to do nothing or look elsewhere. It's almost as though they are doing only what they have to do and no more.
It is a universal truth that if a DB plan offers a lump sum distribution option, participants overwhelmingly opt out of the annuities in favor of LSD. IMHO it makes little sense for sponsors to invest in a retirement income option no one will choose. I see the open market offering some sort of solution to be consumer purchased outside of the plan.
However, and perhaps illustrative of the nascent interest in these offerings, this week’s Editor’s Choice goes to the reader who explained their circumstance in song: “Cue song "All By Myself"; says it all, doesn't it?”
Indeed. Thanks to everyone who participated in our survey! There are more verbatims on the following pages.
First of all, we're a church plan so we have more freedom to develop our retirement program.We have both DB and DC. We allow participants to annuitize their DC balances through the DB plan. There is still the issue of not wanting to give up that chunk of money but since participants already have lifetime income from the DB, it's not as big of a deal for us. We're still interested in GMWB (or whatever name you want to use) but maybe we need to develop our own through our DB plan although that might challenge our risk budget.
"Providing employees the ability to annuitize their DC account so that they can have a lifetime stream of income is an important feature for a DC retirement plan.
If a plan sponsor does not provide a way to turn that DC account into lifetime income, then they are really just offering a savings account and not a meaningful retirement plan."
Concerns about "safest available" annuity provider concept for terminating DB plans being applied to DC plans.
My main concern is that I will "outlive my money", so I purchased a Variable Annuity when I turned 55 with a guaranteed income rider with a portion of my IRA. This gives me peace of mind that I will have something (in addition to Social Security) that will last my lifetime.
Our retirement income option is presented by our recordkeeper in a manner that encourages people to do nothing or look elsewhere. It's almost as though they are doing only what they have to do and no more.
Not too familiar with the private sector...however my wife has options (403(b) and 457) on the governmental side and here is where some oversight is desperately needed. The costs and fees associated with these products are shameful. It is a disgrace that we allow this kind of treatment to public school employees who make a poor salary to begin with for educating our children.
All this discussion could be simplified if we ERs modified their DB and DC plans so that the retiring employee could transfer a portion of his/her DC account balance to the Employer's DB plan, thus effectively purchasing an annuity without the insurance company expense loads. To do this, we must first permit the DB plan to incorporate a "cushion" so that it does not assume all the longevity and investment risk; even in this event, it would still be better for the employee than the commercial annuity.
They remind me of the old GICs, BICs etc. from the late 80's. They were supposed to be "Guaranteed" Income contracts, but one by one the firms backing them went under, leaving so many people without retirement income. It seems everything old becomes new again at some point, and I don't believe we have learned from the lessons of the past. There's too much risk.
It is a universal truth that if a DB plan offers a lump sum distribution option, participants overwhelmingly opt out of the annuities in favor of LSD. IMHO it makes little sense for sponsors to invest in a retirement income option no one will choose. I see the open market offering some sort of solution to be consumer purchased outside of the plan.
It will be interesting to see if this product offering evolves away from obscenely expensive (and highly profitable) insured annuitization.
They seem to be evolving and are costly. They give the impression of trying to make a DC plan into a DB plan, and they're quite different programs.
I put them in the same bucket as I do any "packaged retirement product": Avoid at all cost! My retirement is too important to leave to some "one size fits all of these people" mutual fund.
Our DC plan does contain a retirement income option, but we also have a DB plan with the same options.
Very little interest in the out of plan annuity that we offer.