Providers, Plan Sponsors Focusing on Retirement Income

The evolution of qualified default investment alternative (QDIA) structures, and the expanding flexibility for retirement income solutions are two key trends in the defined contribution (DC) space for 2017, according to the latest findings by global research and consulting firm Cerulli Associates. 

The firm found that slightly less than half of DC plan sponsors currently have a retirement income option, with target-date funds (TDF) and managed accounts being the primary offerings. The figure is slightly higher for larger plans with greater than $500 million in assets. Overall, less than one-fifth of plan sponsors cited a guaranteed annuity product.

But Cerulli observes that product development in the DC space may widen the door for retirement income products. The firm points to a “hybrid” QDIA recently rolled out by Great-West Investments, an affiliate of Empower Retirement.

The Dynamic Retirement Manager automatically switches a participant’s assets from a TDF to a managed account at an age selected by the plan sponsor. The new managed account would include both retirement income allocations and investment options not already on the core menu. Cerulli believes managed accounts are generally better for older investors as they typically have larger balances, justifying a need for a greater degree of personalized advice. Moreover, they also tend to have a greater grasp of retirement needs the closer they are to it. 

Although it is designed for plans of all sizes, Great-West Investments reports that it already has two large plan sponsors on board for the hybrid product.

Dynamic Retirement Manager encompasses annuities. If a plan makes a retirement income product available, the managed account will recommend to it.

The firm finds that nearly half (47%) of all mega plan sponsors prefer to have terminated or separated employees leave their assets in the plan and draw income from their 401(k). Among all plan sizes, the preference for this is at 37%.

Based on Cerulli’s research, 90% of 401(k) plans currently are not designed in a way that would allow investors to make systematic or ad hoc withdrawals – a benefit that older participants ages 60 and older value the most in a retirement income plan. Studies also show older generations are eager for retirement income, but may require better understanding of these products.

Cerulli’s report U.S. Defined Contribution Trends for 2017 notes, “plan sponsors’ belief that participants belong in plan and a potential lack of other options may conspire to force an evolution of 401(k) plans overall. While it is not a quick fix, plan sponsors and consultants can work together to change and amend plan documents such that 401(k) plans more broadly offer the retirement income flexibility that participants need.”

The firm also noted two recent developments by TIAA. One of its products periodically drives assets to a fixed annuity, with the intent of creating a specific level of guaranteed income. TIAA reports that about 10 non-profit organizations use this option. Another product starts allocating to Treasury Inflation Protected Securities (TIPS) once a participant reaches a certain income replacement target such as 80%. TIAA received a letter from the Department of Labor (DOL) indicating both of these products could be considered prudent QDIAs. However, Cerulli notes the DOL drew the line at granting safe harbor for selection of these products in a qualified plan.

“Asset managers should closely watch product development in QDIA trends in the DC market,” explains Bing Waldert, managing director at Cerulli. “These products represent an opportunity for asset managers with capabilities in the multi-asset-class space. Multi-asset-class solutions are one of the key ways in which asset managers are redistributing their intellectual capital to compete against the continuing rise of passive products. This may present an opportunity for insurers and asset managers to work together to introduce guarantees into next-generation products. “

The firm concludes, “Cerulli believes the retirement income space in DC plans is ripe for product development, particularly for insurance companies that continue to experience pressure on their legacy accumulation-oriented annuity business.”

These findings by Cerulli Associates are from The U.S. Defined Contribution Trends for 2017: QDIA Product Development and the Evolution of Retirement Income Solutions report, part of The Cerulli Edge―U.S. Retirement Edition, 1Q 2017 Issue.