While automatic features in 401(k)s have improved plan participation and increased savings, they’ve also added administrative complexity, cost, and fiduciary responsibility.
Since they’re relatively new, guidance has yet to be issued about how to address key questions. This need for greater clarity became apparent as the Department of Labor began to conduct “missing participant” audits.
We’re now asking plan sponsors to fight the battle for retirement security on two fronts: retirement saving and retirement income.
In “Design Matters: Plan Distribution Options”, a whitepaper from the Defined Contribution Institutional Investment Association (DCIIA), the authors write:
“DCIIA suggests that plan sponsors evaluate their plans’ objectives with respect to retired/separated participants and then determine if the plans’ retirement income and distribution options align with these objectives. Plans that seek to encourage plan participation through retirement may want to consider offering retiree-friendly options, including partial withdrawals and periodic payments, as well as products and services designed specifically to provide greater security, stability and sustainability of retirement income.”
It’s little surprise that half of plan sponsors have chosen not to adopt retirement income solutions so far. Many are still working to resolve issues related to improving retirement savings outcomes, so the idea of introducing new plan features without specific guidance may hold little appeal.
According to the 2019 Callan Defined Contribution Trends Survey, the top retirement income options offered by plan sponsors in 2018 were:
- Access to defined benefit pension plans (17.6%)
- Managed accounts/income drawdown modeling services (17.6%)
- Drawdown solution or calculator (10.8%)
- Annuity as a form of distribution payment (10.8%)
- Annuity placement services (9.5%)
Plans that don’t want former employees to keep assets in the plan throughout retirement may find direct rollovers to an IRA with the plan provider to be an appealing choice for a variety of reasons.
First, plan providers are familiar to plan participants. Historically, plan sponsors have been providers’ primary clients. However, many of the services that they provide are directed to participants. As a result, plan providers are well-positioned to deliver retirement income solutions.
Second, direct rollover IRAs often offer institutional investment pricing, which means participants won’t pay more for the same investment choices in which they invested through their plan.
Third, the IRAs offer access to familiar investments, as well as retirement income solutions plan sponsors may not want to include in investment lineups for a variety of reasons.
Some plan providers are firmly entrenched on the retail side of the business and already offer diverse wealth management products to participants, including direct rollover IRAs. For those plan providers that do not have an existing direct rollover solution, it’s an idea that’s taking on added importance. Those firms are left with the option to buy, build, or outsource IRA solutions.
Advantages of Outsourcing
Outsourcing is a flexible and cost-effective choice because it lets plan providers deploy seamless, custom solutions without developing new systems or expanding their staff. The company can remain focused on its core business, while also offering a valuable new service that helps plan sponsors address the needs of a changing marketplace.
Outsourcing a direct rollover solution gives plan providers the option of branded websites, dedicated call centers, and relationship building. Others may prefer a participant-initiated rollover process that begins with a link made available through an e-mail or on a website.
Direct rollover IRAs are a win-win-win for plan sponsors, participants, and providers. Plan sponsors can direct participants to retirement income solutions outside of the plan, alleviating the need to adopt solutions that could increase administrative complexity, cost, and fiduciary risk.
Plan participants gain the option to roll over savings into an IRA that offers familiar, institutionally priced investment options and retirement income solutions while avoiding the need to search for advice from an unfamiliar source.
Plan providers strengthen relationships with plan sponsors by providing them a simple retirement income solution for their participants. Perhaps more importantly, they retain, and in some cases, increase assets under management that may have otherwise gone to a competitor’s IRA.
The pressure for defined contribution plans to extend their relationships with participants into retirement is increasing. Some plan sponsors will embrace the opportunity, while others may find it to be a poor fit. For the latter, working with a plan provider that offers direct rollover IRAs may be an attractive solution.
Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 35 years of extensive consulting experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.