DC Plan Participants Lack Flexible Distribution Options

According to research by global analytics firm Cerulli Associates, 92% of recordkeepers describe offering participants a one-time, lump-sum distribution paid in cash upon retirement or separation as the most frequently offered method of distribution. Only 23% indicated offering one-time lump sums converted to guaranteed monthly or quarterly payments.

The firm also found that nearly one-third of defined contribution (DC) plan recordkeepers indicate that none of their DC plan clients have adopted a guaranteed in-plan retirement income option. Conversely, only 8% of DC plan recordkeepers report that 16% or greater of their DC plan clients have adopted a guaranteed in-plan retirement income option, Cerulli research found. Moreover, Cerulli found that less than half of surveyed recordkeepers let their participants take ad-hoc withdrawals as needed.

“DC plan sponsors and recordkeepers have considerable work to do in expanding the range of distribution options available to retired or separated participants to access their savings in a flexible manner,” says Jessica Sclafani, associate director at Cerulli.

However, the research also shows recordkeepers are incrementally more focused on providing outcome-related metrics such as retirement income replacement ratio and projected participant shortfall or surplus, that gauge participant success in the decumulation phase.

“This shift from focusing on account balance to retirement income terms is also reflected in DC plan participant data with participants under age 39,” says Anna Fang, research analyst at Cerulli. “This group is more likely than older cohorts to view projected monthly income in retirement as the most important information on their statement. The older cohorts remain focused on account balance.”

Sclafani adds “While some DC plan participants may have access to retirement income projections on their statements or plan website, there remains a lack of in-plan investment solutions that facilitate the transition from accumulation to decumulation.”

The research highlights several reasons why plan sponsors may be weary of offering in-plan guaranteed retirement solutions including lack of safe harbor from the Department of Labor (DOL), high fees and lack of portability associated with these options.

Cerulli cites one large DC plan recordkeeper as reporting that “plan sponsors would like to offer retirement income solutions to participants in-plan, but are hesitant to be a first mover, particularly in today’s extremely litigious environment.”

The firm also cites education as a barrier to offering these types of options. Cerulli notes that the DOL’s Conflict of Interest Rule, which goes into effect April 2017, will have a bearing on education because plan sponsors will no longer be able to mention specific investment products in educational illustrations or models, making explaining an already complex product, such as an annuity, even more difficult with plan participants.

In its report, Cerulli also emphasized that segmenting plan participants into ever-specific criteria can be effective in identifying how they process plan-related info and view investing in general. The firm highlights areas such as age, gender and investment balance as key factors in determining these trends among their participants.

In its report, Cerulli noted, “For example, participants age 39 and under overwhelmingly receive statements by email only, with 60% of the 30–39 age range and 79% of the under-30 cohort receiving statements by email only. Only 44% of those age 60–69 receive statements electronically. Recordkeepers can acknowledge this difference by keeping both media available, and focusing costlier written communications on older participants who are more likely to read them.”

Still, the firm says that guidance in the regulatory field is essential for plan sponsors to consider income products and provide retired participants with access to their savings in a flexible manner.

Cerulli concluded that “In sum, it is painfully clear that availability of in-plan guaranteed retirement income solutions that solve for the unique challenges of providing income in retirement remains very low, despite being a perennial DC hot-button issue. This is unlikely to change unless the DOL provides further guidance and safe harbor to plan sponsors.”

These findings are from Cerulli’s third quarter 2016 issue of “The Cerulli Edge – Retirement Edition,” which addresses participant engagement and the current perspective on retirement income solutions in DC plans. It can be purchased online here.