Products & Services April 1, 2025

What to Know About Adding Income to a Plan Lineup

How the regulatory landscape dictates the selection of a retirement income solution—and how advisers can frame the discussion with clients.
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As an increasing number of Americans retire and express interest in receiving regular payouts of their retirement savings, more plan sponsors are considering adding income solutions such as annuities to plans. Last year, 20% of the 500 C-suite leaders in finance and human resources—comprised of 225 plan sponsors who offer a 401(k) plan, 225 who offer a 403(b) plan and 50 who offer a 457 plan—surveyed by TIAA said offering guaranteed income for life was the top way employers can improve workers’ retirements. (Guaranteed income was the second-highest choice behind increasing an employer match.) 

But with evolving regulations and fiduciary responsibilities, income solutions must be properly vetted before being added to retirement plans.

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“In the last year or so, there has been a shift from the ‘why’ to the ‘how’ when it comes to incorporating annuities or guaranteed income into the defined contribution plan,” says Brendan McCarthy, head of retirement investing at Nuveen.

The Regulatory Environment

The regulatory environment has been relatively friendly toward retirement income solutions, in part because products like annuities are often cheaper when offered institutionally in a plan than when offered on their own, sources say. The Setting Every Community Up for Retirement Enhancement Act of 2019 offered lifetime income protections, including the creation of a safe harbor for the selection of annuity providers—shifting the fiduciary responsibility to the issuing companies—and the requirement of lifetime income disclosures.

The SECURE 2.0 Act of 2022 built on the lifetime income-related legislation of its predecessor, including increasing the age at which participants had to take required minimum distributions to 73 from 72, helping the argument for plan sponsors that want to keep participants in plan after they retire. The 2022 law also made it so that participants can have a larger portion of their balance in a qualified longevity annuity contract.

“It’s clear the government, regulators and legislators want participants to have the ability to stay in-plan longer,” says Kevin Crain, executive director of the Institutional Retirement Income Council. He says he thinks that will continue.

But while the regulatory changes have given plan fiduciaries more options when it comes to adding guaranteed income products, adoption is not easy. Every Employee Retirement Income Security Act fiduciary is thinking about their ongoing duty to select and monitor one of these complex solutions.

In general, the existing regulations regarding qualified default investment alternative plan disclosure processes suffice for these types of products. But the plan sponsor and consultant have work to do in modifying the initial processes to accommodate the new products, like annuity target-date funds, McCarthy says. For example, most plan sponsors and their consultants have a strong process in place for the evaluation, selection and monitoring of their plan’s QDIA, a process defined in their investment policy statement or in a specific QDIA policy statement. While there is not necessarily a policy change involved, plan sponsors will want to modify that fiduciary process and document so that they incorporate the annuity TDF selection, he adds. 

Common Challenges

The easiest thing advisers and consultants can do when bringing these solutions to their plan sponsor clients is make them simple, McCarthy says. But that is also one of the biggest challenges. If solutions come across as increasingly complex, administratively burdensome or expensive relative to what is currently in the plan, it will make it harder for the plan sponsor to move down the path of offering pension-like income payouts to their employees.

Retirement income solutions are often complex, lengthening the overall fiduciary relationship and potentially leading to increased cost and the need for more governance and oversight, says Jeri Savage, retirement lead strategist at MFS Investment Management. TIAA’s survey found that 63% of plan sponsors said they are unable to articulate the value and importance of annuities, while 85% of employers said they understand the basics of how annuities work but need a better understanding of how they fit into a plan and portfolio.

Another part of the challenge is navigating the wide array of potential solutions that come to market and assessing which will perform well and survive for years to come. Plan sponsors do not want to sign on to a solution that may not exist in 20 years. Additionally, advisers and consultants are facing the fact that recordkeepers are still trying to catch up with the number of products, which means they are not all available across platforms, McCarthy says. In MFS’ 2024 DC Plan Sponsor Survey, only 14% of sponsors indicated they have specifically added retirement income products to the menu, and waiting for support from recordkeepers is one of the top three reasons some sponsors are not implementing.

Retirement income solutions also may not align with plan sponsors’ overall plan demographics: With a really young workforce, for example, participants do not need retirement income right now. In a workforce with high turnover, it is hard to build out a retirement income solution for participants that will not be there in a few years, Savage says.

Best Practices

The decisionmaking process should be thought of as a framework with which plan sponsors can determine what they want to solve for, as well as the plan’s overarching retirement income solution, Savage says. While solutions may have a wide range of attributes—such as liquidity, flexibility, cost and ease for a participant to understand and a sponsor to monitor—she says it is important to remember that no one product will have every characteristic for which a plan sponsor may be looking.

“There’s always going to be a tradeoff,” Savage says, so creating a framework for evaluations is crucial.

With such complex solutions, how can advisers make them simple enough for plan sponsors to assess and bring to retirement plans?

“The No. 1 rule is to change as little as possible from the current plan,” McCarthy says.

McCarthy says from an investment fiduciary perspective, plan sponsors and consultants should make sure that the new TDF performs as well as its non-annuity TDF counterpart.

“The fact that we’ve embedded the annuity should not increase fees unnecessarily on the broader population,” McCarthy says. “You should not sacrifice cost, and you should not sacrifice performance by moving into this annuity TDF.”

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A Dual Quest for Participant Assets

How can both recordkeepers and advisers work with participants, and what should those relationships look like?
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Art by Clara San Millan

As workplace retirement plans continue to grow—defined contribution plans hit $12.5 trillion in assets at the end of 2024’s third quarter, according to the Investment Company Institute—recordkeepers are dealing with both consolidation and fee compression.

Starting with litigation from the early to mid-2000s and continuing with fee disclosure regulation that came into effect in 2012, recordkeepers have been facing downward fee pressure while navigating new concerns such as cybersecurity. Essentially, industry sources say, they have to do more with less money. As a result, recordkeepers have looked to other sources of revenue, including individual retirement account rollovers, proprietary investment options in client plan menus and even wealth management services.

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But as many recordkeeping firms turn toward participants as clients, advisers are also looking to serve participants and potentially manage their wealth directly or via partnerships with recordkeepers. The adviser-recordkeeper relationship, therefore, which has been characterized as “co-opetition,” is still evolving, as the industry grapples with the feasibility and practicality of both recordkeepers and advisers working with participants.

Space for Both Players

Sean Kelly, an adviser and vice president for Heffernan Financial Services, says there is certainly room for both parties, but the recordkeepers and advisers have to check in regularly to clarify their roles. That could include a demarcation line based on an asset threshold, such as a recordkeeper providing services to participants with fewer than a certain asset amount and the adviser providing services to those with more than that threshold.

The specific asset threshold would depend on the adviser: A younger and growing adviser could have a $50,000 threshold for wealth management services, while an adviser with a larger book or more expertise with components such as tax planning could have a threshold closer to $150,000, Kelly says. He adds that his firm will never turn a participant away and always try to help, but it would be comfortable partnering with a recordkeeper to set an asset level so both parties can provide a service at scale.

“The recordkeepers are great partners that have created an enormous amount of financial wellness resources and the like to help participants,” Kelly says, pointing to budgeting tools and instructional videos. “If it’s a proactive, aggressive sale from the recordkeeper to the participant, trying to capture that business, then that’s a different story. … That’s not necessarily in the best interest of the participant.”

Bonnie Treichel, founder of and chief solutions officer at Endeavor Retirement, says that while high-net-worth clients may have a relationship with a financial adviser outside of their retirement plan, the average participant’s sole source of financial advice is their retirement plan.

“There is plenty of opportunity,” Treichel says.

An Evolving Relationship

There are two ways to engage a participant: education and advice. Sometimes an adviser provides education, and the advice is offered through a managed account or technology-driven solution, so both the recordkeeper and adviser can exist in the relationship. Alternatively, a recordkeeper can provide educational web-based tools to engage with the participant, and the adviser can provide advice for a certain group or demographic, such as those that reach a certain asset threshold or are nearing retirement.

Amy Montford, vice president of individual retirement solutions at Principal Financial Group, says that to provide financial security for the millions of participants that Principal serves, its work has to be done in concert with advisers. But as the recordkeeper’s services evolve to meet the needs of participants, so does its relationship with advisers.

“It’s not a one-size-fits-all,” Montford says. “A true partnership requires us to understand: What capabilities [do advisers] have? What capabilities do we have? How do we best bring them together to really deliver and serve the plan participants?”

For example, Montford says there may be relationships in which Principal provides the phone-based education services and digital tools, while advisers provide on-site education services.

The Challenge

Because recordkeepers both partner with and compete with advisers, there is the potential to strain the relationship between the participant, recordkeeper and adviser.

Treichel says questions can arise about who has authority to possess participant data and the ability to access the participant by leveraging that data. She explains that while the recordkeeper generally has all participant data, the adviser typically gets access to that data as well. But do the recordkeeper and the adviser both have authority from the plan sponsor on their service agreement to use the data to then cross-sell additional participant services? It is an important question amid fee compression, since that is additional revenue with which firms want to make up their margins.

This is both an old problem and a new problem, Treichel adds. Some of the larger recordkeepers were previously known to go directly to plan sponsors and cut out the advisers. Then there was a great effort to change that narrative to one that included the plan adviser as the “quarterback.” But there are only so many sources of money, and so if both players are trying to get at the same revenues—the participants with large balances—it creates a push-pull relationship, she says.

“Some recordkeepers will do it really well and keep the adviser in the middle, and others probably will not,” Treichel says. “There are plenty of revenue opportunities to go around, and the recordkeepers that will be most successful probably will have those good relationships with both the adviser and the plan participant.”

Advisers agree that a harmonious relationship is key.

“We look at recordkeepers—even with all the additional services—as partners,” Kelly says. “Certain recordkeepers are better partners than others and more willing to partner with an adviser than blaze their own trail.”

 

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