Interest in retirement income products among plan sponsors has spiked, but this has not translated to menu options.
Despite studies by myriad recordkeepers and asset managers and the passage of a federal law, few clients have seriously considered adding a retirement income product to their investment lineups, according to fiduciary experts.
“We haven’t seen a lot of clients go down that [retirement income] path yet, but we have seen more inquiries than actual action,” said Kyle Smith, CIO at LeafHouse Financial, during “Managing the DC Plan Investment Menu,” a PLANSPONSOR webinar. “Similar to ESG [environmental, social and governance investing], we’re getting a lot more inquiries than actually people implementing the solutions.”
Smith said that while plan sponsors may not be ready to include retirement income options, the products should be considered. Among the top concerns about including retirement income are the investments’ liquidity, sufficient participant education and fee transparency.
Mat Powers, director of retirement consulting services at Commonwealth Financial Network, explained that it’s early days for including lifetime income products. He advised that plan sponsors must examine the participant demographics when considering including one.
The age, net worth and financial sophistication of participants, as well as a realistic assessment of whether the product would “just sit on the shelf and not get any attention,” should all be taken into account when considering retirement income products, he said.
Ben Grosz, partner at law firm Ivins, Phillips & Barker, added that while the Setting Every Community Up for Retirement Act has put a spotlight on retirement income investments, few workers have asked for it.
“I don’t think any of the folks I work with on the HR finance side have had participants, employees, retirees asking for it,” he said.
He explained that the issue is often brought up by the plan recordkeeper or adviser with a product to sell, the investment committee or more financially sophisticated employees.
“I’ve only had one committee that started on the journey choose to seriously consider adding a retirement income product,” he said.
Congress addressed longevity risk—defined contribution plan participants outliving their assets in retirement—in 2019’s SECURE Act, Grosz noted. The Lifetime Income For Employees Act, which was reintroduced in March, also signals the government’s interest in allowing plan sponsors to include lifetime income products.
“The government is very much aware [of] and working on addressing and enabling products that can address longevity risk, which is one of the consequences of our defined contribution world, now that such a small minority [in private businesses] have DB [defined benefit] pensions,” Grosz said.
Plan sponsors considering lifetime income options must approach the products with the same diligence with which all investments are examined. It is the employer’s responsibility to maintain the same quality of inspection under the rigors of the Employee Retirement Income Security Act principles to apply its twin duties of loyalty and prudence to participants, Grosz added.
Plan sponsors considering a product should, therefore, ensure there is “appropriate education to get the committee to a baseline” for broad understanding of the investments, he explained.
“The second item is don’t just consider the product—it’s not a yes [or] no decision on the product that your investment consultant or your recordkeeper is pitching,” Grosz said. “Think about the decision: do you want to add a lifetime income product? And then the second part of that analysis and decision is, which one or ones would we add?”
Plan sponsors managing the investment menu are also grappling with trying not to overwhelm participants with a multitude of funds. In the last five to 10 years, plan sponsors have tended toward reducing the number of fund options, Smith said.
“We get a lot of proposals for lineups and lineup revisions and that’s one of the common themes: [to] clean up this lineup [and] reduce the confusion, because you get inertia whenever you provide too many options,” he said. “It’s paralysis by analysis [and sometimes] people just don’t do anything at all.”
Plan sponsors have culled fund lineups by removing duplicate investment menu options and placed investments into tiers to categorize funds for participants’ ease of use, added Grosz.
He noted that, for example, clients are grouping investments into a target-date tier, core lineup tier and an esoteric or sustainable tier.
“The main component, for simplification, is to have a QDIA [qualified default investment alternative] that makes sense—if it’s in the target-date suite or managed accounts—something that’s suitable for the participants and simplifies their process so they can sleep at night,” Smith explained. “That’s really the end goal.”
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