Will 2018 be the year of in-plan retirement income options?
The Institutional Retirement Income Council believes 2018 will be the year of the in-plan retirement income solution.
Bob Melia, executive director of IRIC, says that tax reform, the current regulatory environment and market conditions could all contribute to a higher use of deferred annuities and guaranteed income benefits.
A big contributor to the discussion about DC plan retirement income solutions and de-accumulation strategies is the major industry focus on financial wellness, Melia says.
“As more plan sponsors implement financial well-being programs to help employees with retirement readiness, offering plan participants options such as in-plan retirement income solutions will be a critical component,” he says.
He adds that guaranteed and non-guaranteed de-accumulation products and strategies “should grow this year as plan sponsors and other industry stakeholders see the positive impact this will have on overall retirement security and readiness.”
Melia expects these strategies will focus more on the impact they will have on the participant and include factors such as Social Security elections and outside assets, including home value.
There has been talk for years that participants in defined contribution plans need to have access to some form of guaranteed lifetime income in retirement and that they eventually would be offered in workplace-sponsored 401(k) and 403(b) plans, but that hasn’t materialized yet.
Some of the impediments to that happening have been the perceived risks that plan committees and fiduciaries see out there with litigation around excessive fees and the debate over the fiduciary rule and who is considered a fiduciary, Melia says.
That fear has prompted plan sponsors and fiduciaries to take the simplest and most straightforward approach because “you don’t want to look too different. You don’t want to be the outlier because of the heightened level of fiduciary risk,” he says.
The other impediments to offering in-plan guaranteed income options are that the “defined contribution industry has not really taken a more holistic approach to participants’ financial needs and retirement security,” he says.
In the past, these options were more product pushes from service providers. Now, plan sponsors are being asked to take all of a person’s financial assets into account when talking to plan participants about how they should manage the de-accumulation phase of retirement savings.
“I think the financial wellness conversations are starting to deal with that. Once the industry gets past its fiduciary concerns and deals with it from a comprehensive perspective on behalf of plan participants and [addresses] participants from an emotional perspective we will see more inclination and adoption rates of in-plan solutions,” he says. “Those are the barriers, how you start to navigate around them.”
Upcoming legislation that relates to the retirement industry could also benefit plan sponsors and plan participants.
Melia highlighted the Retirement Enhancement Savings Act that was first introduced in 2016 and could be brought back in a new form in 2018, which would require DC plan statements to include the amount of money a participant could expect to receive on a monthly basis in retirement based on their projected account balance. It also provides a Safe Harbor for guaranteed income where the plan sponsor could work with an insurer to receive certain testaments from an insurer. By complying with the legislation, fiduciaries could “limit their liability and can be protected from any losses incurred in the adoption of the guaranteed product,” Melia says.
The legislation also offers portability. If a “distributable event” occurs, meaning the plan sponsor no longer wants to offer the guaranteed income product, participants would be able to rollover their guaranteed investment with their insurer and protect their guaranteed income.
“This would solve the portability issue that has also been an impediment to adoption of guaranteed investments,” he adds.
Another change coming in 2018 is that de-accumulation and in-plan incomes have always been with the insurers themselves, but now record keepers and asset managers are looking into these types of options as well, including guaranteed and non-guaranteed options. Target-date funds are also being outfitted with in-plan guarantee options and managed account providers have shown interest in providing advice on draw-down strategies for retirement plan participants, Melia says.
He hopes that in-plan guaranteed income strategies will take off like target-date funds eventually did. It just takes time, he says.