Need for Retirement Income
As life expectancies continue to climb, Americans are increasingly less confident that their savings will last through retirement. Therefore, advisers might consider talking to their plan sponsor clients about offering retirement income products.
According to Northwestern Mutual’s “2016 Planning and Progress Study,” two-thirds of Americans believe there is some chance they will outlive their savings, with one in three (34%) saying the likelihood is 51% or better. Fourteen percent think they will definitely outlive their savings.
However, Americans are failing to proactively address the financial implications of living longer, by taking steps such as increasing their savings (21%) or purchasing an annuity (44%).
The lack of preparation is particularly concerning given decreasing confidence about the future of Social Security; only one-quarter of Americans (24%) say it is “extremely likely” that Social Security will be there when they retire.
This may be why there is increasing pressure on retirement plan sponsors to offer retirement income products. However, while the Department of Labor (DOL) has supplied some guidance on in-plan annuities, such products are still extremely uncommon in defined contribution (DC) plans.
The 2015 PLANSPONSOR Defined Contribution Survey found that about half—50.6%—of defined contribution plans allow participants to make systematic withdrawals at retirement, thus creating a predictable stream of retirement income. The trend is somewhat more common among large plans, having $200 million up to $1 billion of assets under advisement (AUA) (57.8%), and mega plans, having more than $1 billion of AUA (62.4%).
However, when it comes to annuities or income products that guarantee income, nearly one in six defined contribution plans (58.6%) offer no type of income product. A mere 6.9% of DC plans offer in-plan income products that guarantee monthly income. Further, only 3.5% of plans offer an out-of-plan annuity purchase/bidding service. However, out-of-plan annuity purchase/bidding services are offered by 15.5% of mega plans.
| Retirement Income-Oriented Products/Services Offered in 401(k) Plans | ||||||
| Overall | Micro (<$5mm) | Small ($5mm – <$50mm) | Midsized ($50mm – <$200mm) | Large ($200mm – $1b) | Mega (>$1b) | |
| In-plan income products that guarantee monthly income | 6.90% | 5.80% | 7.20% | 8.10% | 7.80% | 6.20% |
| In-plan income products that guarantee a base benefit | 3.00% | 2.20% | 3.10% | 3.90% | 4.30% | 1.20% |
| In-plan income not offering guarantees | 7.90% | 6.90% | 7.30% | 6.60% | 11.00% | 13.00% |
| Out-of-plan annuity purchase/bidding service | 3.50% | 0.90% | 2.80% | 3.90% | 5.20% | 15.50% |
| Unsure | 24.00% | 37.10% | 24.70% | 14.80% | 9.40% | 6.80% |
| No income products offered | 58.60% | 60.10% | 58.20% | 67.80% | 69.40% | 61.50% |
| Does Your DC Plan Allow for Systematic Withdrawals* at Retirement? | ||||||
| Overall | Micro (<$5mm) | Small ($5mm – <$50mm) | Midsized ($50mm – <$200mm) | Large ($200mm – $1b) | Mega (>$1b) | |
| Yes | 50.60% | 41.40% | 52.40% | 57.80% | 57.80% | 62.40% |
| No | 29.20% | 23.90% | 30.70% | 32.90% | 35.20% | 30.60% |
| Unsure | 20.20% | 34.80% | 16.90% | 9.40% | 7.00% | 7.00% |
| *Systematic withdrawals (vs. lump-sum or partial distributions) allow participants to schedule a series of recurring payments, thus creating a predictable stream of retirement income. | ||||||
| Source: 2015 PLANSPONSOR Defined Contribution Survey | ||||||