Want higher 401(k) engagement, participation rates and therefore better retirement outcomes? Position 401(k)s as retirement income distribution vehicles, rather than a tool to help employees “save for retirement.”
It’s simple, yet massive, and could be the key to industry, advisor and retiree success.
It’s increasing important in light of expectations that more assets will remain in 401(k)s, and not be rolled over, due to the Conflict of Interest Rule’s implementation in 2017, according to research and consulting firm Cerulli Associates.
Not surprisingly, however, Cerulli finds there are several obstacles that must be addressed before this can happen, including a lack of flexible distribution options for retired plan participants and low plan sponsor adoption of “in-plan retirement income solutions, particularly those with a guaranteed component” (read annuities).
On a positive note, data also shows record-keepers are increasingly focused on outcome-related facts and figures, such as the retirement income replacement ratio and projected participant shortfall or surplus, which gauge participant success in the decumulation phase of their 401(k) plan clients.
“This shift from focusing on account balance to retirement income terms is also reflected in DC plan participant data with participants under age 39,” Anna Fang, research analyst at Cerulli, said in a statement. “This group is more likely than older cohorts to view projected monthly income in retirement as the most important information on their statement. The older cohorts remain focused on account balance.”
“DC plan sponsors and record-keepers have considerable work to do in expanding the range of distribution options available to retired or separated participants to access their savings in a flexible manner,” added Jessica Sclafani, associate director at Cerulli.
Virtually all record-keepers describe offering participants a one-time lump-sum distribution, paid in cash, upon retirement or separation, as the most frequently offered method of distribution.
And 401(k) participants want to know what they have, as well as what they will have.
“While some DC plan participants may have access to retirement income projections on their statements or plan website, there remains a lack of in-plan investment solutions that facilitate the transition from accumulation to decumulation,” Sclafani continued.”
Nearly one-third of DC plan record-keepers indicate that none of their DC plan clients have adopted a guaranteed in-plan retirement income option.
Until the Department of Labor offers an explicit safe harbor related to annuity provider selection, Cerulli does not anticipate significant implementation of in-plan guaranteed retirement income solutions.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
