By Mark Olsen, Managing Director at PlanPILOT
Retirement income services and solutions have remained an overarching theme in the defined contribution (DC) space for many years—yet to date, implementation and traction has remained limited. The need to help plan participants translate retirement savings into income is real and well understood. In equal form, the layers of complexity and variation in approaches have influenced the tepid pace of adoption thus far. In this article, we will offer a backdrop of complicating factors, summarize key retirement service and solution concepts, and provide suggested activities for plan sponsor consideration.
The Perpetual Cycle of Retirement Income
All parties involved in DC plans have a keen understanding of the actual need to assist retiring participants in the draw-down of their retirement savings. What remains in question are several matters: who is the responsible party in the setup, who should bear the cost, and what are the solution(s) best suited to meet the need. Plan sponsors broadly know they have a role in solving what can be referred to as the “retirement income conundrum,” but they also know they cannot do it alone. In fact, they are beholden to partners such as recordkeepers, asset managers, and even insurance companies to be able to offer solutions.
As if the reliance on provider partnerships were not complicated enough, over the last decade, legislative and regulatory bodies have sharpened their focus on retirement income, adding pressure to sponsors to get it right. This has put plan sponsors at the center of a complex pursuit. Market studies and surveys suggest that retirement income services and solutions are a top priority, yet the vast majority of plans have limited retirement income optionality available to their retiring participants. According to the PIMCO’s Defined Contribution 2022 Consultant Study, reviewing retirement income solutions is identified as the number-two priority of plan sponsors, second only to review of target-date funds.
Does all this mean we are doomed for retirement income to be in a perpetual infancy stage?
Influences and Hesitations
As with anything, it is very easy to find reasons why not to do something. The list of influences on the fits and starts of retirement income solutions is quite long. Providers (asset managers, recordkeepers, insurance companies, etc.) have to build revenue-positive businesses to make the investment of time and money worthwhile. Who bears the cost of the setup and accessibility on recordkeeping platforms is a significant contributor to pauses and delays. We also remain in a state with a hangover of some recordkeepers still working to maintain asset management, which creates another layer of complexity in introducing new solutions and services on captive platforms.
Further, and perhaps the biggest debate, is whether to default participants into a ready-made solution with retirement income optionality or give choice. Many studies reveal that the lens of most plan sponsors and consultants is that there is not a single right solution that will magically satisfy the retirement needs of all individuals. Rather, there is broad preference to focus on plan objectives, individual needs and unique circumstances, and participant demand to inform the pursuit.
Realistic Steps
There are countless lists and grids available that position retirement income solutions and services accessible in the marketplace. Broadly, the range of options out there includes solutions that are in or out of the DC plan, include guarantees or non-guarantees (annuity or endowment like payouts), and incorporate advice and services to help participants identify a direction suitable to their needs. Broadly, it is safe to say that the legislative and regulatory bodies have strongly signaled support and encouragement for plan sponsors to make available solutions and services to help participants draw down their retirement assets.
Our position is that most, if not all, plan sponsors are wise to engage on the topic to establish their plan’s position on the topic. An important starting point is for committees overseeing plan assets to establish their objective for retiring participants—the role of the plan and if they wish to assist participants in the post-retirement phase. Important considerations include:
- Determine if you want assets to remain in the plan at retirement.
- Establish a view on whether a single solution or range of services and solutions are most suitable for the plan, and which type(s) align to your participant needs.
- Learn which offerings your recordkeeper has on their existing recordkeeping platform and assessing if they meet your plan needs.
- Discuss your committee’s views on suitability of guarantees and non-guarantees, and preference of offering solutions in or out of the plan, and
- Develop a timeline to inform your path forward.
The Bottom Line
All in, there simply is no single right way to tackle the complex topic of retirement income. Doing this work does not mean the result for every plan sponsor is that retirement income solutions or services will be added to the plan. However, we believe it to be beneficial for all committees to engage in productive dialogue on the topic and answer key questions about your plan to determine the right path forward. There are resources available to help untangle and simplify the retirement income pursuit…and we are here to help!
Want to learn more? Call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.
About Mark
Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.