SURVEY SAYS: Guaranteed Income Options in DC Plans

March 4, 2013 - Retirement income is the emerging focus of our industry, and offering annuities or other guaranteed income products in defined contribution plans (DC) could be the next big thing.

Last week, I asked NewsDash readers, do you think DC plans should offer guaranteed income options, and if your plan offered them, would YOU use them?  

Interestingly, while more than one-third (35.8%) of responding readers said yes, DC plans should offer these options, one-third (33.3%) indicated they would not use them if their DC plan offered them. Twenty-one percent said the guaranteed income options should be offered in DC plans, if they are able to be rolled out of the plan by departing participants, and 9.4% said they should be offered, but only if further guidance is offered by the Department of Labor or Internal Revenue Service.  

More than 7% agreed the products should be offered only if costs are low, and 5.7% said they should if a plan’s recordkeeper can accommodate them. Nearly 2% each indicated it depends on participant demographics or only noninsurance products should be offered.  

Seventeen percent of respondents said guaranteed income options should not be offered in DC plans.  

As for whether readers would use them, aside from the one-third that said no, more than one-quarter each said they would use a guaranteed income option in their DC plans if the cost was low or if the balance could be rolled out of the plan if they changed jobs. Nearly 12% simply indicated they would use such an option; 2% each said they would if the product was from a particular vendor or if it was an insurance product.  

Verbatim comments were mixed for and against using guaranteed income products in DC plans; some mentioned the unknowns or problems with such options-“Would not be interested if, as an employer, I would not be able to change 401k providers because of a guaranteed income product in the DC Plan.” Several readers pointed out that we had a solution to guaranteed income in retirement with defined benefit (DB) plans: “We already have guaranteed income options: we call them defined benefit plans!” Editor’s Choice goes to the reader who said: “Instead of forcing the square peg into the round hole, I would rather have a DB Plan!”


Our 401K plan's benefits are to be paid in the form of a joint and survivor annuity unless that form of payment is waived. In 26 years I have NEVER processed a distribution in the form of an annuity. I would not choose an annuity - they are too expensive and it is a gamble. 


Although I answered that yes I would use a guaranteed income option, I do have some hesitation. The fact that the contract is really between the Company and the guaranteed income provider and not directly with the employee makes me nervous. 


Thanks to all those brilliant minds who convinced employers to abandon DB plans for DC plans. The yolks on you. You could have saved the country a great deal of pain if you tweaked DB plans so they could be adequately funded rather than jerking us all around. 


The problem with these "guarantees", of course, is the cost that will be associated with them. 


I think the kind of product that would work in a DC plan is a few years away. It was hard to pick one single answer above. They have to be portable, easy to understand, low cost & fee transparent, as well as elective. 


Two scary things about guaranteed income - will the issuer stay in business long enough to provide the guarantee? Is the cost reasonable? 


Need to distinguish between in-plan options for active participants and options at retirement or roll out. Also differences between guaranteed income provided by fixed payout annuities, and income protection provided through "withdrawal guarantees". 


I believe that there is a demand for guaranteed income options, but participant education is necessary before implementation. 


I believe DC plans should have the OPTION of offering a guaranteed income product, if it is desired by the participants and deemed a prudent decision by the trustees. I don't think there's a one size fits all answer. However, I do feel that any investment made available in a plan must be flexible and provide options when participants leave the plan or plan sponsors change service providers. 


Who is guaranteeing them? And what happens if they fail? 


Oh,, goodie! I am guaranteed 2% interest for the rest of my life! 


Maybe we should encourage participants to live within their means and stop allowing loans, and in service withdrawals unless they sign a contract that indicates that they understand that by making a withdrawal from their retirement plan or not contributing at all that they are accepting the risk of not having enough money at retirement and that they understand the tax payers will not contribute to their well being so if they buy that boat or go on that cruise they must weigh the future consequences. Hardship Withdrawals should also be further limited to unforeseen emergencies. Annuities are too expensive and have high surrender costs, they are not the answer.

Verbatim (cont.)  

We already have guaranteed income options: we call them defined benefit plans! 


We are looking at this right now at our company. I would like to participate but a lot depends on the structure. 


Instead of forcing the square peg into the round hole, I would rather have a DB Plan! 


There are some very good in-plan retirement income products on the market today. The importance of eliminating longevity risk and sequence of returns risk cannot be overstated when it comes to achieving successful retirement outcomes. 


Nothing in the DC world is guaranteed unless someone, other than participants, can make a lot of money for providing said "guarantee." 


Since mortality under a retirement plan by law must be based on unisex rates, it usually makes more sense for a male to purchase an individual annuity instead. 


An annuity purchase as one choice for taking some part of DC plan distribution could be a very attractive option for retiring participants. 


too many unknowns and too many apparent charlatans just ready to take participant money! 


"Should" offer; sure, why not, what the heck, good idea, it's an option vs "Required" to offer; whoa-not in my back yard. Hasn't the gub'ment done nearly everything but deliver the death blow to that golden goose. 


Would not be interested if, as an employer, I would not be able to change 401k providers because of a guaranteed income product in the DC Plan. 


I think that guaranteed income in DC plans sounds great...but the devil is in the details. People like the "sound" of guaranteed income but don't realize the limitations and high fees that come with that "guarantee". It's an idea that's worth pursuing, but not worth offering in its current form. 


Why does the cost have to be "low"? What's wrong with "reasonable"? Ditto to the options about it being from a particular vendor (or type of vendor), or if it could be rolled over - would you present so many variables to the question of including a target-date fund? That said, your question highlights the real challenge presented by these offerings today...way too many choices, choices that add complexity and cost for plan sponsors and participants alike. 



NOTE: Responses reflect the opinions of individual readers and not the stance of Asset International or its affiliates.