In 2019, the SECURE Act added provisions that simplified the process of incorporating lifetime income solutions into defined contribution (DC) retirement plans. Over five years later, studies show that adoption continues to stall.
Despite an uptick in offerings and a continued interest in the products, plan sponsors and their employees continue to display skepticism and uncertainty on retirement income. A DC Plan Sponsor Survey from investment manager MFS recently found that while employers have evaluated guaranteed income options, just 17% say they are “very” or “extremely” likely to incorporate a solution within the next 12 to 18 months.
When asked why, most said they were already “happy with their current plan,” while others say they received low participant demand on the products.
Panelists at the National Association of Plan Advisors (NAPA) 401(k) Summit in Las Vegas Monday aimed to identify the barriers behind such low demand, and what the industry can do to curtail it.
Bonnie Treichel, founder and chief solutions officer at Endeavor, explained that advisors must change their frame of questioning if they want to see increased usage. Rather than wait to talk about lifetime income solutions until they see a growth in uptake, advisors must be more proactive with how they initiate that conversation, Treichel urges.
Likewise, instead of delaying conversations due to low participant demand, advisors should understand how their role as fiduciaries bounds them to recommending helpful products for clients.
“It’s your job as the expert to understand these solutions and bring them to plan sponsors and see if whether this would be a good solution or not,” Treichel adds. “Not if a plan participant asks if this is a good in-plan solution.”
Jeffrey Gratton, senior vice president and managing director for Institutional Retirement at SageView Advisors, notes that plan sponsors are slower to adopt because they would rather delay until there is increased uptick in other plans. However, he urges advisors to take a more valiant approach in suggesting products when useful to participants.
“I think in the industry we need to be a lot bolder in recommending these solutions when appropriate for clients,” he said. “We all believe there is space for someone to annuitize their 401(k) balance with the right solution—I think we just get stuck on the how, the expenses, etc.”
Another area of contention includes safe harbors and safeguards for plan sponsors. While the SECURE Act of 2019 includes a statutory safe harbor protecting employers who adopt lifetime income options, previous regulatory safe harbors have scared some employers from implementing the products. It could be helpful to remind employers that the current safe harbor is a statutory law, rather than a regulatory requirement established by government entities like safe harbors in the past, Treichel said.
“Having a statutory safe harbor is a better one to have than the one we had in 2008,” she defended. “The safe harbor gives us protection and a form of liability if a set of conditions are met.”
Ultimately, Gratton anticipates usage among the products to rise within the next years. He touched on similarities between the forecasted growth and that of automatic enrollment in years prior. While automatic features were slow to implement at first, the features have skyrocketed in usage thanks to widespread industry adoption and regulatory requirements.
“Nobody was talking about reenrollment or automatic enrollment—we were the ones pushing that,” he concluded. “If we can go through so many changes over the years, I’m certain this will be one where there will be tons of more adoption.”
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