5 Reasons Why More Plans Don’t Offer Retirement Income Options
A frequent commentary on today’s plan designs is that they are more focused on accumulation than the eventual spend-down of those savings.
It’s said that defined contribution plans too often not only facilitate lump-sum distributions, but, in design at least, encourage them. And yet, despite a growing awareness of the importance of retirement income planning, PLANSPONSOR’s 2014 DC Survey
finds that nearly half of plan sponsors offer no income-oriented products to their participants.
Here’s five reasons plan sponsors give for not offering retirement income options.1. There is no legal requirement to provide a lifetime income option.
Let’s face it, it’s a full-time job just keeping up with the plan provisions, standards, participant notices and nondiscrimination tests that are required by law. The notion that a plan sponsor would, in the absence of a compelling motivation take on extra work, and work that carries with it additional financial and fiduciary responsibility as well, doesn’t seem very realistic.
That said, plan sponsors — particularly larger plan sponsors — take on plenty of other plan design changes that aren’t forced on them, most notably the automatic enrollment designs outlined in the Pension Protection Act of 2006
However, with no obligation to provide this offering, and an underlying concern that providing the option does involve taking on additional liability.2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”
I’ve never met a plan sponsor who felt that the guidance on offering in-plan retirement income options was “enough.”
I’m not saying they’re not out there – clearly there are in-plan options available in the marketplace now, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. That said, industry surveys indicate that only about half of defined contribution plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s following the 2008 safe harbor regulation
from the Labor Department regarding the selection of annuity providers under defined contribution plans.
That said, earlier this year, the Labor Department in Field Assistance Bulletin (FAB) 2015-02 acknowledged that they had heard those concerns, and offered some insights on how to “reconcile the ‘time of selection’ standard in the safe harbor Rule — which embodies the general principle that the prudence of a fiduciary decision is evaluated under ERISA based on the information available at the time the decision was made — with ERISA’s duty to monitor and review certain fiduciary decisions.”
Part of this additional clarity was the point that the plan fiduciary among other things appropriately concludes that, at the time of the selection [emphasis added in the DOL’s FAB], the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided. “At the time of the selection” is further defined as the time that the annuity provider and contract are selected for distribution of benefits to a specific participant or beneficiary; or the time that the annuity provider is selected to provide annuities as a distribution option for participants or beneficiaries to choose at future dates.
I’m not saying that is “enough” — but clearly the Labor Department is listening, and trying to close that comfort gap. And if you haven’t yet read FAB 2015-02
, you should.3. Operational and cost concerns linger.
While several industry providers have offered what seem to be workable, effective solutions to the “portability problem,” plan sponsors remain concerned that the cost and complexity of transitioning these offerings — either by individual plan participants, or the plan itself — would be daunting, at best.4. Participants don’t take advantage of the option when offered.
The so-called “take up” rates among participants can be sliced in different ways — by provider (the options are varied, after all), by participant age, even by the involvement of the employer in positioning in the option — but however you parse it, the word I’ve generally heard to describe participant adoption rates is… ”disappointing.”
Now, that kind of response hasn’t stopped plans from putting in options like self-directed brokerage accounts (SBDAs) over the years (on the other hand, the participants who were embracing SDBAs tended to be fairly influential voices).
And there is evidence that even defined benefit plan participants, given the choice between taking a lump sum or an annuity, often go for the former. That said, a study
by the non-partisan Employee Benefit Research Institute (EBRI) also supports the notion that plan design matters, and matters to a large extent, a large extent, drives annuitization decisions.5. Participants aren’t asking for it.
Once you’ve walked through all the objections to in-plan retirement income options, it all seems to come down to this. Despite industry surveys that suggest worker interest in the concept (if not the reality) of retirement income solutions, it never seems to get to the level of expressing that interest to those who actually make retirement plan design decisions.
Plan design can surely help steer participants toward these options, but most advisors I’ve spoken with say that, for a variety of reasons (cost, complexity) these retirement income options are still sold, and not bought.
Sure, most plan sponsors acknowledge that participants (certainly older, longer-tenured participants) could use the kind of help that a retirement income structure could provide, and yes, plan sponsors are looking for a more secure safe harbor, and they’d certainly welcome a PPA-ish “nudge” in that direction.
But until it becomes an articulated concern for the workers they hope to attract, retain and eventually retire from their workforce, it’s likely that the adoption rate — by plans and plan participants — will be slower than might be hoped.