Prudential Advocates More Guarantee, Coverage in Retirement Plans

At Prudential’s market outlook today in New York City, Kalamarides cited challenges that continue to face the retirement industry going into 2010: Most Americans aren’t saving enough; retirement assets don’t control enough for downside risk; and even the most diligent savers must worry about outliving their retirement savings, or longevity risk.

But Kalamarides said the current defined contribution system is “not broken” as critics have suggested. He noted that today the vast majority of savings is focused in DC plans, yet those plans “were not originally designed to be the primary savings vehicles they are.”

“To ensure retirement security, employers and employees have to take action,” Kalamarides said. He mentioned some initiatives Prudential has presented in order to “redefine retirement,” such as implementing more automatic features and downside risk protection (see “Prudential ‘Redefines’ Retirement”).

Target-Dates ‘Neither Problem nor Solution’

Target-date funds have been scrutinized this year after the market meltdown and are being evaluated by the Securities Exchange Commission (SEC) and the Department of Labor (DoL) (see “Target-Dates Useful but Flawed, Witnesses Tell SEC and DoL”). Kalamarides said he thinks the SEC and the DoL will work to help investors better understand what they are investing in when investing in a target-date fund—rather than telling plan providers how to change their investment strategy.

Kalamarides asserted that target-date funds are “neither the problem nor the solution” to mending the 401(k). While the vehicles can help participants to diversify, Kalamarides said, the industry needs to think about getting “through” retirement, not just “to” retirement—which is where guaranteed income products come in.Prudential has been vocal in its push for adding more guarantee features to retirement plans, and offers an in-plan guaranteed income product called IncomeFlex (see “The Inside Story”).

Plan sponsors and retirement plan advisers have been hesitant to implement relatively new in-plan guaranteed income options, often citing reasons such as the extension of the fiduciary responsibility and the difficulty to explain them to participants.

Yet Kalamarides is optimistic and cited two catalysts that could help guaranteed income products gain more ground in the marketplace: public policy and the participation of large plans. He told PLANADVISER he expects to see more large plans picking up IncomeFlex in 2010, and noted that Prudential itself offers the product to its employees.

Secondly, the Department of Labor can also be a catalyst to make guaranteed income products more of the norm. The agency this month plans to release a formal request for information (RFI) about guaranteed income annuities and similar investment products (see “DoL Set to Issue Annuity Project RFI”). The results of the RFI could provide a safe harbor in the future for plan sponsors to default participants into annuities during the drawdown phase.

Sponsors and advisers also cite portability as a concern for these products. Kalamarides expects to see more providers offering the products, making portability less of an issue. (In the IncomeFlex product, participants can also rollover to an IRA when leaving the plan.) He also mentioned that recordkeeping platforms Hewitt Associates and Mercer have already taken up Prudential’s IncomeFlex Target product (see “Mercer, Hewitt Give Clilents Access to IncomeFlex Target”).

Right now only a handful of providers offer in-plan guaranteed income products in various forms. Having more competitors could help guaranteed income products have more traction, Kalamarides said. “We’re Coca-Cola out there and it would be great to have a Pepsi.”

Coverage

While workplace retirement plans might need to reform going forward, the industry cannot forget about the millions of workers who don’t even have access to a workplace plan. The Obama Administration plans to combat the issue with a proposal for an automatic IRA (see "Retirement for All").

The 401(k) adviser might see Obama’s proposed automatic IRA as a potential threat to business, but Kalamarides said there is no cause for concern, as bringing more small businesses to the marketplace could be a good opportunity for advisers. 

Kalamarides said Prudential is also advocating for a multiemployer plan, which allows small businesses to pool purchasing power. The plan would be a type of SIMPLE 401(k) for employers with 100 or fewer employees. The proposal will be presented in Congress in the spring.