A new paper by the Institutional Retirement Income Council (IRIC) highlights non-guaranteed retirement income payouts (NGRIPs) rather than lump sum payments in 401(k) plans and other defined contribution (DC) retirement plans.
Under a NGRIP, retirees assume investment risks associated with their retirement account balance, as well as potentially living longer than their account balance will last.
Even though benefits are not guaranteed to retirees, many could prefer one over a guaranteed income option due to flexibility and low-cost advantages, according to the IRIC.
The organization highlights what it says are main elements of NGRIP structures, including:
The underlying investment portfolio can utilize the same investment options available under the accumulation stage of the plan or the plan can make other investment options available.
There needs to be a process to determine the initial payout as well as any periodic changes to that payout.
At death the remaining balance, if any, is payable to the retiree’s designated beneficiary.
The retiree generally has access to the account balance at any time.
When it comes to determining the initial payout for NGRIPs, these could include a traditional flat 4% percentage, a required minimum distribution (RMD), or an actuarial approach where “the initial amount is determined based upon an assumed life expectancy and investment return.”
The IRIC notes in its report that after the initial year payout, it “is common” for the payout amount to change, and it could be because of how the initial year payout was determined. For example, when a flat percentage is used, it could either stay the same or it could recalculate to reflect the investment experience, adds the report. Since NGRIPs are meant to be flexible, retirees could also change their payout amount and take unscheduled payouts.
Initiation and fiduciary liability
Employers wanting to offer the feature could first discuss with their plan recordkeeper to see if there is an NGRIP they could already support, or they can work with an investment advisor or outside consultant to adopt or create one, the IRIC says.
“Once a NGRIP is selected the Plan will likely require an amendment, the report states. “A process will need to be put in place with the service providers to process scheduled payments (usually monthly but could be quarterly or annually) and initiate periodic payout changes as specified under the NGRIP.”
To minimize potential fiduciary liability, the IRIC recommends plan sponsors provide “accurate and complete information about the NGRIP, including disclosures related to fees, payout assumptions, and risks (e.g., investment and longevity).”
Because there is a chance that the money could deplete before a participant’s life span, the IRIC emphasizes that employers do not include “explicit or implicit representations that would the participants to believe that payments are guaranteed.”
Additionally, the IRIC writes that “NGRIPs are likely to have expenses borne by participants using this feature,” including the cost of “developing modeling tools, determining updated payout amounts, as well as processing periodic payments. To the extent that these additional costs are paid out of the plan, a fiduciary should ensure they are reasonable.”
SEE ALSO:
- The 2024 Game Plan for In-Plan Annuities
- Participant Demand, Auto-Features Among Top Predictions for Retirement Income
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
