3 Cs Give Many Plan Sponsors Pause on In-Plan Retirement Income

Plan sponsors are compelled by retirement income options to help provide a more secure retirement for their participants, but the “three Cs” of complexity, cost and choice are giving many of them pause, according to a new survey from Greenwald Research.

The survey, which included responses from both plan participants and plan sponsors, found that 59% of plan sponsors view in-plan income options as “too complex.” Greenwald’s survey asked respondents about “retirement income options,” which includes any option designed to generate income in retirement, both insured/guaranteed and non-guaranteed. 

Nearly one in three sponsors reported concerns that associated fees will mean higher costs for their companies, while 30% said they are worried about the additional administrative work that offering income options would require. Some sponsors also reported concerns about ensuring participants have enough choices of retirement income options.  

At the same time, 72% of employees expressed concern that their retirement income sources may not be simple and easy to manage. This concern increased in 2023 from 2022, when 62% of employees said they were concerned about complexity. Despite this, 37% of participants said complexity is not an issue if there is someone who can explain it to them or if it is explained clearly in written materials.  

The Three Cs 

Lisa Greenwald, the CEO of Greenwald Research, says the main barriers to plan sponsors offering retirement income solutions comes down to the “three Cs.”  

“I think sponsors and their advisers and consultants are always keenly focused on cost,” Greenwald says. “I think there’s a real lack of awareness of what the cost might be, because so few have gotten to a point to even have been exposed to costs. … There’s also focused concern on cost for younger, early entrants paying for something they may or may not use in the future.” 

Greenwald says the issue of choice comes into play, as she said many advisers told her in interviews that they feel many of the current options are “not fully baked” and that there are not enough “good choices” in the market currently.  

In terms of the number of retirement income options that employers should offer, three in four participants said in the survey that their employer should offer more than one choice. The survey found that participants with graduate degrees are significantly more likely to want at least three retirement income options in the plan.  

Question of Defaults 

Greenwald adds that the strategy of incorporating a retirement income solution into the default investment, such as a target-date fund, is something on which plan sponsors and participants have split opinions.

“Some of the concerns we’ve heard from sponsors, advisers and participants [is that] automatic [defaults] feel very paternalistic,” Greenwald says. “There’s also some real concerns we’ve heard about retirement income and decumulation being even more complex than accumulation, and it’s going to be harder to find a one-size-fits-all solution because retirement income is more complicated.” 

In addition, while four out of 10 participants said their company currently offers retirement income options, fewer than one-quarter of these employees actually utilize these options, according to the survey. However, Greenwald points out that there may be some “messiness” with these statistics, because there is a major lack of understanding of what the industry means by “retirement income,” and she says it is possible many participants are incorrectly stating that they have retirement income options when they actually do not.  

“That said, … there’s a real concern about uptake rates and that even if these are available, without automatic enrollment or [a] default, it might not get the uptake that [the plan sponsor] hopes or expects,” Greenwald says. 

She adds that some participants want nothing to do with their employer once they retire, which is sometimes an impetus for wanting to take money out of their retirement plan and not selecting one of these retirement income options.  

Negative Reputation Around Annuities 

The study also found that about 48% of participants would be reluctant to use an in-plan retirement income option because of the reputation of annuities. Greenwald says participants are mainly concerned about liquidity and having access to their account balance. Many participants also associate annuities with a high cost, even though an in-plan annuity is expected to be less expensive than a retail annuity.  

“We’re hearing from sponsors that they find [in-plan annuities] compelling and want to learn more about how annuities have evolved and how annuities that may be put in one of their DC plan options are different than retail annuities,” Greenwald says. “I think the [skepticism] around annuities could be overcome, but it will all lead to low or slow uptake.” 

As a whole, almost all plan sponsors surveyed said they believe a comprehensive retirement income planning program would increase participants’ comfort level with income options, the amount participants are willing to contribute and participant utilization of in-plan options.  

Greenwald’s study included online surveys conducted from September 26 to October 23, 2023, of 1,003 plan participants aged 30 to 70, as well as surveys of 503 plan sponsors representing companies with at least 50 employees.