In a recent interview with ETFtends.com, David Blanchett said plan sponsors show increased interest in providing in-plan solutions in their DC plans.
Fiduciary Insurance Services
In an apt turn of phrase, Blanchett, head of retirement research for defined contribution solutions at QMA LLC, stated that “Increasingly, plan sponsors want to get their people not just to, but also through, a high-quality retirement,” with the “getting to” being the traditional role of these plans.
This has been a trend for a long time in the making. In-and-via-plan income solutions have been discussed among DC industry experts for at least the past decade as the first wave of DC participants neared retirement age. It became apparent that there were real advantages to having retirees convert accumulated funds into guaranteed funds, or at least dependable, income streams via in-plan designs.
These advantages included overcoming behavioral biases, institutional pricing, stronger long-term returns, expert advice, etc. The passage of the SECURE Act in late 2019 provided a tailwind to this trend by offering more options for lifetime income strategies and easing perceived fiduciary roadblocks to embedding annuity solutions.
ALIRT Insurance Research
But as interest in implementing income solutions grows, plan sponsors (along with their consultant partners) now face a new type of hurdle: how exactly to go about researching, selecting, and implementing these options.
To help plan sponsors and their advisors meet this challenge, The Institutional Retirement Income Council (IRIC), a non-profit think tank for the retirement income planning community, has released a series of white papers aimed at educating the defined contribution community around this secular shift towards in-plan income solutions, the benefits derived from this shift, and ideas around how best to implement a plan.
Below we address the second of these three white papers: Cumulative Benefits of Retirement Income Solutions in Our DC System specifically addressing the advantages of institutional retirement income for plan participants, sponsors, and society.
Plan Participants
Plan participants arguably have the most to gain from in-plan income solutions.
It is no secret that a growing number of Americans are concerned about retirement prospects, given both the lack of adequate savings over time and the lack of secure pension payouts due to the secular demise of the defined benefit plan. Many will need to supplement Social Security payments with other sources of income, including those accumulated in 401(k) and other defined-contribution plans.
“Designing and implementing a strategy that provides the necessary supplementary income can be tough on a do-it-yourself (DIY) basis.”
But designing and implementing a strategy that provides the necessary supplementary income can be tough on a do-it-yourself (DIY) basis. Maintaining higher allocations to equity investments, historically crucial to deriving higher retirement income over time, can be behaviorally challenging when one is faced with market volatility.
In addition, participants have to reckon with longevity risks which may lead them to unnecessarily curtail spending in their early, most active retirement years out of fear of depleting funds. Throw in expense surprises, such as much higher health care costs and unknowns around future inflation, and a DIY strategy looks especially daunting.
The purchase of guaranteed income using part of one’s defined contribution nest egg solves for all of these challenges by shifting investment and sequence of return risk to an insurer, removing longevity risk, and thus allowing for confidence in spending over time, with additional benefits from institutional pricing and mortality credits.
Plan Sponsors
Regarding plan sponsors, attracting and maintaining an incentivized workforce has become a leading priority given the numbers of employees that are now voluntarily separating from their employment in a phenomenon dubbed “The Great Resignation.” One significant benefit draw for employees beyond compensation is an attractive retirement plan.
According to a 2019 Willis Towers Watson study, only 17% of DC plans include a guaranteed income option, while 70% of plan participants consider access to guaranteed income to be extremely or very valuable: this strikes us as a disconnect that plan sponsors should consider rectifying.
As our white paper concludes, “Attracting and retaining top-tier talent will require sponsors to keep their benefit plans current and fresh, and adding a guaranteed income option can help retain and attract top talent.”
In addition to helping to bind employees to their workplace, a DC plan that offers guaranteed income solutions may well make it easier for older – and generally better compensated – employees to retire on their preferred timeline. This frees up positions for younger and less well-compensated employees to assume. This saves cost for both the employer and retiring participants and, importantly, allows existing employees to grow professionally without having to seek employment opportunities elsewhere.
Lastly, retaining assets within an employer’s DC plan is cost-effective. It spreads provider costs across a larger base of plan assets and gives the plan sponsor leverage to negotiate the most cost-effective deals with its service partners.
Society
In the end, finding ways to guarantee lifetime income is a boon to society at large, as it helps keep seniors out of poverty and thus lowers the number of citizens dependent on federal support (saving tax dollars). Furthermore, guaranteed income provides these benefits while simultaneously promoting responsible consumption through the retirement years, which results in broader economic benefits.
Taking a larger view, a citizenry that feels secure in its retirement prospects, whether current or future, is likely to enjoy better mental and physical health, and therefore be more productive members of society at large.
As illustrated in the white paper, there are myriad benefits to implementing new product designs for traditional defined contribution plans that embed guaranteed income options. These benefits will accrue principally to the plan participants themselves in the form of greater retirement security but also plan sponsors in the form of enhanced benefits packages to attract and retain workers, as well as in cost savings.
As a society, it is incumbent upon us to reimagine a retirement system that supplements minimal Social Security payments and provides as many citizens as possible the financial means to enjoy a financially secure and optimally productive life after their working years.
The Institutional Retirement Income Council (IRIC) is a non-profit, membership-based organization of industry advisors dedicated to sharing best practices, informing about legislative and regulatory issues, and facilitating solutions for plan sponsors and their participants. IRIC’s mission is to facilitate the culture shift of defined contribution plans from supplemental savings programs to programs that provide retirement security. By providing a forum for insightful, solutions-oriented thought leadership on institutional retirement income, the IRIC promotes the need for retirement income adequacy for defined contribution plan participants.
Michelle Richter is the executive director of The Institutional Retirement Income Council, a non-profit, membership-based organization of institutional retirement plan advisors.
David Paul is a principal at ALIRT Insurance Research, a firm specializing in the financial oversight of insurance companies.
