By Mark Olsen, Managing Director at PlanPILOT
Employer-sponsored retirement plans are in the midst of a significant evolution in how they will be designed to serve both employers and employee participants. As I summarized in a previous blog article, in just a few years all U.S. baby boomers will either have reached (or be on the cusp of reaching) retirement age and based on statistics will likely live another 20-30 years.
Since the age of pension income has long since passed, retirees will need to spend their retirement savings to complement whatever Social Security benefits they receive as they transition from a life of savings accumulation to one of replacing working income to meet their expenses. However, as cited in many studies, including this one, participants are ill-equipped to understand and implement strategies to efficiently obtain ongoing retirement income that can both sustain their intended expenses and outlast their retirement years.
Due to liability protections offered by the SECURE Act of 2019, employers are now able to include income features with their employee retirement plans to help participants structure their accounts upon retirement to include retirement income solutions that could suit their needs and effectively help them manage their retirement finances. Even with these new protections, however, employers may still be unsure how to implement new provisions in their plan. At PlanPILOT, we’ve observed that not enough plan sponsors are offering retirement income features, and participants may be at a loss as to how to structure their retirement finances.
Understanding Participants’ Needs and Solution Criteria
As I’ve discussed, the individual needs of participants could greatly vary, so it’s important for plan sponsors to have a deep understanding of the participants’ general financial circumstances and long-term goals. Once this understanding is achieved and quantified, plan sponsors must assess the myriad of features offered within available income strategies and solutions for the plan to create a program that can help meet most or all of the stated participant objectives.
This includes educational features that guide participants through this life transition phase and helps them make informed decisions about which solutions best suit their own needs. Having this component fosters confidence in the program and further lowers liability risk for the plan sponsor. All this is the first step in creating a fully updated and relevant retirement plan.
Selecting Solutions: What to Implement
Once the needs of the participants and criteria for plan design have been established, the next step would be choosing the income solutions to implement. According to PGIM Research, stable value funds and an income fund within a target-date offering are the most widely used vehicles for retirement income. In-plan annuities (due, in part, to the opportunities afforded by the SECURE Act) are the most popular new solution being considered.
Choosing in-plan annuities could present a hurdle to overcome: whether the current recordkeeper/investment custodian is able to offer annuities within the plan. Annuities are a product of insurance companies, and while many insurance companies offer custodial and recordkeeper services to retirement plans, if the current recordkeeper is not an insurance company, changing to accommodate the new income features may be a problem, or at least a consideration. Further, the plan sponsor still has the fiduciary duty to vet any annuities offered in the plan. Currently, there are few resources to benchmark or qualify annuities, and the complexity of annuity products may be more than the plan sponsor is willing or qualified to handle.
Plan sponsors may also consider alternative solutions, including managed payouts, guaranteed and non-guaranteed income options, or other annuity-like contracts. It’s critical to remember, however, that while more choices may sound like a good idea, as a fiduciary, plan sponsors are still required to examine and monitor these selections to verify they are appropriate for participants.
Advice and Education
Once the implementation of selected income solutions has been completed, it’s still crucial to provide educational features and programs within the plan. Participants will need help with planning appropriately to pursue their objectives, as well as the software and other tools. Guidance and advice from qualified financial professionals may be useful, especially for those who have reached retirement income phases of life. Such participants may have questions regarding optimal times to claim Social Security, apply for Medicare benefits, and charitable giving.
Utilizing Professional Assistance
Implementing new aspects to a retirement plan can present significant challenges to a plan sponsor, especially when considering the complexity of choices, fiduciary duties and responsibilities, and avoiding liability issues. You also want to facilitate a smooth implementation process and “get it right the first time” to foster confidence with your participants.
At PlanPILOT, our company is uniquely positioned to help you with these objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.
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, and CUPA-HR.