Retirement income products within 401(k) plans just aren’t up to snuff, according to new research from Cerulli Associates. It’s a particular challenge for retirement plan sponsors, annuity providers, and retirement savers in accessing accumulated assets to create an ongoing income stream.
“Structural restrictions and limited adoption of in-plan income products prevent defined contribution plans from being a suitable vehicle for income,” Bing Waldert, managing director, U.S. research at Cerulli said in a statement. “Recent federal policy action, in particular the Department of Labor (DOL) Conflict of Interest Rule, addresses the shortcomings of the DC system and the conflicts that can arise when defined contribution (DC) assets are rolled over to an individual retirement account.”
“Cerulli strongly agrees with the intentions of the Conflict of Interest Rule designed to raise the standard for financial advice,” Waldert continues. “However, raising the standard for the rollover decision may prevent assets from flowing from DC plans to IRAs when, in fact, the IRA is a more flexible platform. Critics of the DOL suggest that the additional regulation would create a barrier to lower-balance participants getting advice. We believe this concern is largely overblown.”
Cerulli expects that 401(k) plan design will evolve over time to make the platform more flexible. In the meantime, the industry must find solutions to deliver nuanced advice around retirement income to low-balance investors. Technology will ultimately play a role in income planning, particularly for lower-balance investors whom the traditional wealth management system has not served.
“Wealth management firms could build a program that incorporates existing income planning tools, technology for scalable implementation, and telephonically based advisors to help with the necessary trade-offs in income planning,” Waldert explains. “Banks and insurance companies would be strong candidates for this type of service because they already serve numerous client relationships through multiple channels.”