Steady Stream: 2012 Retirement Income Buyer's Guide
Often overlooked by retirement plan advisers and sponsors, retirement income options in defined contribution (DC) plans can prevent participants who rely on an average life expectancy in their planning from outliving their retirement savings.
“The problem with averages is, it’s okay if you’re the ‘average Joe’ or less than the ‘average Joe’ in the situation, but if you live too long or longer than planned and you run out of money, that’s not a good position to be in,” says Srinivas D. Reddy, senior vice president of institutional income at Prudential Retirement.
To ensure retirees can match their expenses with income, retirement income options allow participants to think in monthly terms. In this sense, they resemble defined benefit (DB) plans—“old-school pensions”—that many companies can no longer afford, says Jason Chepenik, a managing partner of Chepenik Financial. However, retirement income options can, in fact, save plan sponsors money.
Participants who do not save adequately for retirement might work longer, Reddy says. With older employees on the books, companies will face costly payroll and health care expenses.
This raises the question: Why aren’t more advisers recommending retirement income options to plan sponsors?
Plan Sponsor Concerns
Reddy says he sees plan sponsors make statements such as, “Well, I don’t want to be first,” “No one’s asking me for [a retirement income product],” and “I’m not sure what my liability is in the future, if I do have one.”
Chepenik echoed this legal concern. “It’s a litigious society,” he says. “Especially the 401(k) world today—there’s much more focus on not making a mistake, and, if you follow the past, it’s harder to make a mistake. If you do your own thing, you get called out for it.”
In late July, a survey by our sister magazine PLANSPONSOR asked readers whether they believe offering a retirement income option as an investment choice for defined contribution plan participants is a good idea.
The largest percentage (48%) of sponsors said “yes,” offering retirement income to plan participants is a good idea, provided certain concerns are worked out first. Twenty-six percent said it “depends on the plan and participant demographics.” Twelve percent chose the response “yes, definitely,” and 14% said “no, not at all.”
Clearly, advisers have their work cut out for them since sponsors’ biggest concern about offering retirement income options was “participants won’t understand it” (61%), followed by “it would require additional recordkeeping technology and could drive up costs” (55%), and “it would create additional administrative burdens for employers” (53%). Forty-nine percent agreed “it would create additional liability for employers,” and 22% chose “participants won’t use it.”
Lack of Participant Interest
Retirement income options are still far from the norm, so many participants are not asking for them. Citing Steve Jobs, who created demand for his innovative products that the world did not know to demand, Chepenik says, “[Participants] don’t know what they want until they see it.”
Due to this lack of familiarity with their plans and the “set it and forget it” stance toward retirement, participants might not flock to retirement income options. However, that does not mean advisers should ignore these options. As attorney Fred Reish says, “Plan sponsors concerned about successful outcomes for their employees should focus on providing gap analysis, along with the investments and services that support lifetime income in retirement.”
Advisers should examine “the services and investments the plan provides for retirement income,” Reish says, because “if participants do not receive those services or investments, the plans may fail—for two reasons. First, this ‘decumulation’ phase is much more difficult than the accumulation phase. Second, retirement plans can get institutional pricing of annuities and mutual funds, but when participants purchase those investments on their own, they undoubtedly will pay retail prices. The differences between institutional and retail rates can be substantial. They can be the difference between success and failure.”
Recordkeeping Challenges
The obstacles facing recordkeepers—who need to adapt their systems to store information such as participant age and contribution flow, which are unnecessary for mutual fund recordkeeping—are another setback for these income options, Reddy says.
But recordkeepers do not have to retool their systems to accommodate these additional information needs alone. Companies such as DST Systems Inc. and SunGard offer middleware that attaches to a recordkeeper’s software to help implement the income option, Chepenik noted.
To that end, for those advisers considering a retirement income option for their retirement plan, the PLANADVISER Retirement Income Buyer’s Guide provides a listing of 58 recordkeepers and a chart detailing whether they offer out-of-plan or in-plan options (guaranteed or nonguaranteed), as well as a summarized presentation of the income capabilities of several leading providers. While nearly all (49) have some sort of out-of-plan option for sponsors and participants, in-plan options are less accessible, though still available at half of vendors—29 recordkeepers offer in-plan nonguaranteed options; 22 recordkeepers supply in-plan guaranteed options.
We hope the information on the pages that follow helps provide a valuable starting place as you consider retirement income solutions for your plan and participants.
Click here for the full buyer’s guide and information on methodology.