From Curiosity to Action
“All of my clients are feverishly talking about it,” says adviser Stace Hilbrant, about in-plan retirement-income products. “But people are not comfortable with the details yet.” Hilbrant, who is managing director at Wilmette, Illinois-based 401(k) Advisors LLC, compares sponsor reluctance to their uncertainty about target-date funds before the default safe harbor was provided.
“I think this is the next generation of the 401(k): a guaranteed income-for-life solution that is part of the 401(k),” Hilbrant says. “It’s on everybody’s mind, but it is a little premature, for a handful of reasons.”
“Over the past 24 months, there has been a significant shift from curiosity to action,” Alison Borland, retirement outsourcing strategy leader at Aon Hewitt, says. Of the dozen Aon Hewitt clients currently implementing in-plan solutions, three selected insurance products, while the rest opted for managed-payout solutions in managed accounts.
For now, most sponsors continue to hold off concerning in-plan products, but an adviser’s help could be useful for thinking the possibility through. “The concept is a great idea,” says Ellen Lander, a Jamison, Pennsylvania-based principal at White Oak Advisors. “But the devil is in the details.’”
On that front, here are five steps to help you address these products with your sponsors.
1) Keep in mind the sponsor’s goals.Talk first with an employer about its philosophy and goals for the plan. “We do have a few plans that have implemented in-plan income solutions, and several others have asked us to vet their options and the pros and cons,” says James Robison, an Indianapolis-based principal at White Oak Advisors. The solutions appeal most often to not-for-profit clients, he finds, frequently in health care. “Many of these organizations have been curtailing their defined benefit [DB] plans and accumulations, but they are accustomed to providing a structure that has a known income stream in retirement,” he says.
Hilbrant describes those employers most drawn to in-plan solutions in this manner: “Let’s assume you are an employer that is paternalistic, and you like the idea of making the plan as attractive as possible to participants. The attraction is going to be that you can help your participants improve their confidence in their retirement planning.”
Adviser Randall Long has one client using Prudential’s IncomeFlex and numerous others considering in-plan options. “A lot of it has to do with the work force and whether [this option] would be appropriate,” says Long, managing principal at SageView Advisory Group in Irvine, California. For instance, he says, the possibility may appeal to employers whose workers have long tenures and large average 401(k) account balances. On the other hand, if the employer also offers a defined benefit plan and its participants will receive an approximate 60% replacement rate between the plan and Social Security, many participants may not need more guaranteed retirement income, he says.
2) Understand sponsors’ level of fiduciary concern. Some employers are becoming more accustomed to the fact that they will have fiduciary exposure if they neglect to help participants prepare for the retirement-income phase, says Sri Reddy, head of institutional income at Prudential Retirement. But most still feel uneasy about offering in-plan annuities, largely because no safe-harbor rules exist to clearly spell out how to include them.
“If you were to ask an employer how income solutions fit into the fiduciary discussion of investment management, most advisers don’t even know that,” Hilbrant says. Portability issues with these products at the plan and participant levels make selecting and monitoring them well even more critical.
“Clearly, in terms of the barriers, fiduciary concerns are right there toward the top of the list,” and a safe harbor would speed up sponsors’ acceptance considerably, Borland says.
Reddy would like to see a safe harbor outlining how sponsors handle insurer selection, including what product structures best suit a 401(k), what criteria and time horizon to consider, and a how-to for evaluating fees. But when that might come to be remains unknown.
3) Determine whether the fees make sense for participants. With plan fees and expenses under so much scrutiny, Lander says, sponsors are hesitant to try something new. “Some of these products are pretty expensive, and that’s an enormous drag on participants’ return.”
The first question sponsors ask Hilbrant is: How do we vet the expenses? In-plan insurance products carry higher fees than some other options, and their fees are less easy to understand than something like an S&P 500 Index fund. When helping sponsors decide if the extra expense makes more sense than a managed-payout solution, or something similar, Reddy says, “You have to balance ‘Do I want the certainty, or do I want to take the chance?’”
Advisers can help sponsors evaluate whether the fees will seem merited to the plan’s participants, Long says. “You can model out the different expected rates of return, with and without the guarantee, and then you can get a sense of where the breakeven point is on having the product,” he says. Also, compare both the fees and features with retail products, Reddy suggests.
4) Compare the product specifics. Among in-plan insured options, sponsors gravitate most often toward those offering a guaranteed minimum withdrawal benefit (GMWB), Borland says. “There is a lot of flexibility. So participants receive the market upside, yet they have protection on the downside,” she says. “A participant also has the ability to pull out the market value of his or her account at any time, without penalty.”
Asked about key considerations for these products, Reddy first mentions the guarantee. “There are a lot of nuances. You want to make sure the plan sponsor is comfortable with the risk profile
of the guarantor,” he says. And product features can vary, so make sure sponsors understand the tradeoffs. “One may offer a participant the ability to retire and take withdrawals earlier but with a substantially reduced guarantee,” he notes. Find out at what age the guarantee kicks in, which can differ from provider to provider. Plus, if a product offers a spousal benefit, ensure the sponsor is clear on the cost or tradeoff of the guarantee. And look at the underlying investment options. For products tied to target-date funds, the sponsor needs a clear grasp of the glide path near, at and going through retirement.
5) Gauge realistic participant interest. Take-up on in-plan products has been low, Reddy says, attributing this to participant inertia.
Aon Hewitt has not done specific studies on participant interest in these products, Borland says, but other surveys have revealed curiosity. Still, “If you ask someone, ‘Hey, would you like something that will give you income for life?’ people will say, ‘Yeah, sure,’” she says.
People may indeed be baffled by the new, “incredibly complicated” generation of guaranteed-withdrawal products, Lander says. “They have so much flexibility [built in], I find them overwhelming,” she says. “But we are still in the first generation. For the second and third generations, I hope that the message becomes simpler.”
The products will continue to evolve, Long says. “Most plan sponsors are reluctant to be early adopters, but the concept of ‘look at retirement in terms of monthly income’ is spot-on.”