A new study from global consulting firm Willis Towers Watson reveals that although less than one-quarter of defined contribution plan sponsors offer lifetime income solutions for retirees, another 20% are planning or considering them.
“The shift from defined benefit to DC plans has increased the complexity for employees because unlike retirees who receive a predictable, monthly check from their DB plan, DC plan members have to figure out how to generate a stream of income from the big balance in their account,” says Willis Towers Watson senior investment consultant Bill Dewalt.
The study defines lifetime income solutions to include a broad spectrum of approaches, ranging from simply providing educational materials on the challenges of turning an account balance into an income stream to modelling or planning tools to payout strategies.
The most widely offered lifetime income solutions are partial or systematic withdrawals from the plan during retirement, lifetime planning tools and education. Other more effective solutions, such as in-plan and out-of-plan annuities, are offered much less frequently.
Nevertheless, usage is low among survey participants offering lifetime income solutions overall. Sixty-one percent of sponsors reported a quarter or less of their participants used in-plan managed account services with a non-guaranteed payout service, while just more than half reported a similar usage of lifetime income education. Less than a quarter of employees capitalized on lifetime income planning tools or used partial or systematic withdrawals during retirement.
Even where lifetime income solutions are offered, plan sponsors can improve their outreach to participants and their response to longevity risk by tracking lifetime income solutions use and determining whether lack of knowledge about member usage and low participation are linked.
It is also suggested that plan sponsors and providers of guaranteed insurance-backed products and non-guaranteed investment management choices need to work toward reducing cost, administrative complexity, and ﬁduciary risks to generate additional interest for these products among employers and employees.
Of the plan sponsors not considering or interested in a lifetime income solution, 87% selected fiduciary risk, 67% selected cost and 60% selected market offerings that are not satisfactory or too new as very or extremely important barriers.
“Many employers are still reluctant to offer insurance-backed products like annuities and guaranteed minimum withdrawal because there is a concern both around the fiduciary aspect of choosing an insurance provider and about what exactly plan sponsors must do as fiduciaries to satisfy the five-step safe harbor rules,” Dewalt says.
See also: Annuity strategies in retirement
Dewalt believes it is a hopeful sign that 55% of all survey participants actively monitor the evolving market or insurance-backed products such as annuities and guaranteed minimum withdrawal benefits that manage longevity risk.
“I think something everyone should be doing right now is talking to their record-keepers to find out what lifetime income solutions they have available that have not yet been included in the current plan design,” he says. “Explore these solutions and get comfortable with them because it could be a relatively simple step to make them available right now.”
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