Simple Lifetime Income Products Best for DC Plans

In a world where technology dominates and new techniques pop up day by day, a recent MetLife white paper highlights how simplicity might just be key to retirement planning.

The simple nature method stems from a 2016 Lifetime Income Poll generated by MetLife, in which it was found that most plan sponsors (85%) would prefer that a DC plan serve as an income source throughout retirement, a pronounced increase from the 2012 study, in which only 9% of plan sponsors believed the same. Not surprisingly, plan sponsors have since been contemplating income annuities in defined contribution (DC) plans in order to secure retirement for plan participants.  

“The overall theme of simplicity is really important because we see this time and time again with the defined contribution plan world, that any time there’s complexity, inertia sets in,” says Roberta Rafaloff, vice president of Institutional Income Annuities in Corporate Benefit Funding at MetLife.

The paper examines several retirement income products, such as guaranteed lifetime withdrawal benefits (GLWBs), guaranteed minimum income benefits (GMIBs) and guaranteed minimum withdrawal benefits (GMWBs), in comparison to immediate fixed income annuities and qualifying longevity annuity contracts (QLACs), noting how income annuities and QLACs can be the best option for those searching simplicity.

Fixed income annuities or QLACs are means for participants to “complete” their retirement readiness process, according to the whitepaper. These annuities let participants distribute retirement income at significant stages and allows them to be as simple as needed—all while being cost-effective.

“The beautiful thing about income annuity is you can offer benefit options, but to the extent that they can be limited and really focused in on the retiree population,” says Rafaloff.

The paper mentions that while GLWBs, GMIBs and GMWBs offer income flexibility, ensure “retirement readiness,” and incorporate features that can solve a number of problems that participants may have—such as a shortage of liquidity and investment gains failure—many participants refuse to utilize these options because of its complicated nature, making it difficult to understand and tough for sponsors to interpret. While the idea behind a guarantee is favorable among responders, 58% do not believe withdrawal solutions with minimum guarantees are simple enough for participants to understand, according to the study.