SURVEY SAYS: Retirement Income Options in DC Plans

July 23, 2012 (PLANSPONSOR.com) – Last week, I asked NewsDash readers if offering a retirement income option as an investment choice for defined contribution plan participants is a good idea.
By PS

The biggest percentage (48%) of responding readers said yes, if certain concerns were worked out first. Twenty-six percent said it depends on the plan and participant demographics. Twelve percent chose the response “yes, definitely,” and 14% chose “no, not at all.”  

The biggest concern about offering retirement income options in DC plans selected by respondents was “participants won’t understand it” (61%). This was followed by “it would require additional recordkeeping technology and could drive up costs” (55%) and it would create additional administrative burdens for employers” (53%). Forty-nine percent of readers agreed “it would create additional liability for employers,” and 22% chose “participants won’t use it.”  

“Other” responses included: 

  • Could be hard to switch vendors 
  • additional restrictions/fees to participants 
  • Also concerned about future of some of the insurance companies that may be offering them, and if we have an obligation to go out to bid every few years, what would happen to the assets in these options at that time? 
  • although there may be additional administrative burdens and cost the whole point of the retirement plan is to provide a sustainable income at retirement 
  • These options are a very expensive way of trying to get back to a DB plan. 
  • Product would need to be completely portable to maintain adequate flexibility for plan sponsors and participants. 
  • creates higher fiduciary liability 
  • stuck with provider’s guaranteed product and can’t shop around for better solution at retirement. 
  • You can’t lock up participants and jeopardize a fiduciary’s ability to make changes 
  • It would take leadership to make sure employees receive a monthly retirement check for life similar to prior generations.  
  • too expensive for participants 
  • portability, long-term viability of insurance companies 
  • participants will sue when things don’t work out… 

 

Comments about retirement income options in DC plans expressed similar ideas as the “other” responses to the question about concerns, such as long-term viability of insurers, restrictions on participants, providing portability, and expenses to participants. Several respondents noted the irony of DC plans trying to be more like defined benefit (DB) plans now.  

On that note, my favorite verbatim comment was: “It’s ironic that that move from traditional DB plans to DC plans has somewhat come full circle by offering a retirement income option. A lot of time, money and hassle could have been saved if traditional DB plans could have been improved to equitably share the liability between the employer and employee. A hard lesson learned.”

Verbatim   

Regulators will screw it up. 

 

Not sure the monthly income will be enough to warrant tying up money in such an option. Although if you could insure NO loans would be allowed from money in that choice you might then at least be providing "some" retirement funds for certain people who seem determined to spend their retirement money BEFORE they retire. 

 

Pricing is definitely a concern. 

 

It's ironic that that move from traditional DB plans to DC plans has somewhat come full circle by offering a retirement income option. A lot of time, money and hassle could have been saved if traditional DB plans could have been improved to equitably share the liability between the employer and employee. A hard lesson learned. 

 

With the sizable number of account balances below $20,000, what good would an "annuity" really do? 

 

A defined benefit plan will always be the most economically efficient way to provide retirement income, because assets are pooled, risks are diversified, and liabilities are smoothed (at least more so than in a DC arrangement). Any change to a DC plan that provides one of these factors is an improvement in efficiency, but only if the cost does not outweigh the benefits. DC plans never have and never will provide retirement security for the masses, because: 1. They are more expensive. Individual accounts need more money per person, because any amounts left by those who die early leak out to heirs and are not used to pay retirement benefits. The average cost per person in a DC plan is significantly higher than in a DB plan -- this is also true of individual accounts in social security. 2. For DC plans with participant-directed investments -- employees will always invest DC assets into the wind. Employees and employers will maximize contributions during economic booms (buy high) and deplete assets (sell low) during recessions. If our population relies on DC plans only (and save as instructed), workers will work longer (upward pressure on unemployment); workers will save more (downward pressure on consumer spending); and overall there will be more investment dollars chasing fewer investments. Moreover, the next generation of workers in our labor force will be less experienced because the top level jobs will be occupied by older workers. If a retirement income option is priced to add to the economic efficiency, it can be a step in the right direction, but if it's like the ones I've seen so far it's not much help. Employers will always be scrutinized by the plaintiff's bar. Currently, the scrutiny surrounds the fees charged. With income options, there will be another level of scrutiny in selecting the company (typically an insurance company) to provide the annuities. 

 

I don't see the value of adding a retirement income option to a plan when an employee could roll the money out and have a much better choice of income options outside of the plan in say an IRA. Not to mention the administrative burden of keeping those participants active in the plans and additional costs per participant if applicable that would have gone away had they rolled the money out. 

 

Great as an option for plans that only offer DC. Should be optional for plans that still have a DB 

 

If you believe that most participants will never understand the complexity of recordkeeper fees, think about trying to explain the hidden costs included in insurance company provided annuities. 

 

These options are much more difficult for a fiduciary to monitor the underlying investment quality. They will create issues, but for all their issues I believe they are still worth examining. 

 

VA's with a GLB are simply too complex for my employees to understand. The extra fees to cover the guarantees reduce accumulation potential and employees won't know their needs for guaranteed income until they retire. 

 

Thorough study to prevent rising costs would be needed. The last thing a retiree should be concerned about is losing more retirement funds to the feds for record keeping!

Verbatim (cont.)  

A retirement income option needs to have continuity in the event of plan service provider change. It should also be portable for rollover purposes in the event of employee retirement/termination. 

 

Let's use DB plans! It's significantly more efficient. 

 

It is a fine and a good idea to allow a participant an annuity conversion on retirement. It is a scam to allow participants to lock into income streams over their working careers. First of all, this prevents portability. Participants are locked in. The fact of the matter is that average investments are only kept for five to seven years, yet participants would be locking in for a 30 to 40 year career. The likelihood is that it will be surrendered, and they will have paid for nothing. Also, the lock-ups make it extremely difficult for fiduciaries to make changes when necessary. Any long-term-thinking fiduciary would be crazy to lock themselves in. If something goes wrong down the road, they're in the precarious position of having a fiduciary breach if they do nothing, or forcing a surrender, which means the participant paid a lot for nothing. 

 

A retirement income option is sorely needed. The option should come with detailed explanations of how the option is structured. We need to help our employees increase their financial literacy so that they can make informed decisions. 

 

The underwriting appears to be a significant issue. The required asset allocations can get abusive with poor investment choices with high current expense loads that build current profits but not a solid foundation for reserves. 

 

Well, we've sold the gospel of (wealth) accumulation for all these years and had folks blindly filling their coffers. We may as well sell them something to buy with it. I got it! A DB plan - what a concept. 

 

In our 1 DB that has a lump sum option, 95% of retirees elect the lump sum option. Do participants ascribe a value to having a steady, known income amount in retirement? 

 

It's a good idea, up to the point where the participant is about 30. After that, buying into it gets expensive and will turn participants off. 

 

It's hard to argue that helping participants find some kind of reasonably priced and secure retirement income option, and to let them invest there before that magic day on which they "retire", isn't a good idea. What's less clear is why a plan sponsor should have to extend our neck/risk one second beyond the day on which a participant ceases to be one (a participant). Besides, i find the government's involvement/intimations here to be more than a little "creepy." Particularly from an Administration that seems more-than-willing to rewrite the rules 20 years down the road and pretend like those were the rules all along. Just saying... 

 

There are a host of other issues. This is a complex offering, with lots of variables to take into account. It is not (yet) as portable as some would like us to believe, and it's (still) relatively expensive to change your mind. And that glosses over concerns about the financial stability of providers, not just here and now, but for decades to come (though those who raise those issues will be quickly assured that no annuitant has ever missed getting his check. To which I simply state "AIG.". Like so many things, it's a wonderful theory, and I think a real need. But there's still no real upside for plan sponsors in complicating the fund menu, while adding even more risk and complexity to OUR lives.

«