How Sponsors Can Offer Guaranteed Lifetime Income

DIETRICH and OneAmerica Retirement Services hosted a webinar Thursday, “Securing Guaranteed Income in Retirement: Strategies for lifetime income in Defined Contribution plans,” that explored the need for guaranteed lifetime income, the obstacles sponsors face when trying to offer in-plan annuities, and one way to offer guaranteed lifetime income outside of a 401(k) plan.

“With the decline of the defined benefit (DB) plan, we at DIETRICH feel very strongly that plan sponsors, administrators, retirement plan advisers and insurance companies can make a difference in how participants benefit from a defined contribution (DC) plan,” said Geoff Dietrich, vice president at DIETRICH. “Plan sponsors continue to shift away from DB pension plans to the DC model, and DC plans are now the main retirement savings vehicle for Americans, even though they originally intended to be a supplemental savings plan.”

Dietrich went on to say that one of the main concerns of retirees is outliving their savings. “As a result, employers, employees and the government are starting to recognize the deficiencies of DC plans,” Dietrich said. “The vast majority of employers, 84%, are not confident their workers will have adequate savings for retirement.”

As the model has shifted from DB plans to DC plans, “the consequence has been the elimination of the guaranteed lifetime income benefit provided by these former DB plans,” he said. “Only 5% of 401(k) plans offered a guaranteed retirement income product in 2015, according to the Plan Sponsor Council of America. The single biggest advantage of annuities over other investments is that you cannot outlive them.”

Dietrich then pointed to several legislative developments meant to encourage sponsors to offer in-plan annuities. In 2008, the Department of Labor issued safe harbor conditions on the selection of annuity providers in a DC plan. A 2015 Field Assistance Bulletin (FAB) further clarified the safe harbor.

The first document said that sponsors should engage in an objective, thorough and analytical search and consider competing annuity providers. They should consider the financial security of the insurer and its ability to make all future payments, and they should consider the reasonableness of fees. Importantly, the FAB said that sponsors were only responsible for relying on information about the insurer available at the time of the selection of the annuity.

The proposed 2018 Retirement Enhancement and Savings Act would provide a fiduciary safe harbor for the selection of a lifetime income provider and protect sponsors from liabilities for any losses that may result due to an insurer’s inability to satisfy its financial obligations.

Despite these assurances, sponsors are still hesitant to offer in-plan annuities because of their complexities and portability issues, Dietrich said.

This is why OneAmerica Retirement Services has developed OnePension, said Pete Welsh, vice president of distribution at the firm. It is a profit-sharing plan that invests the money in an annuity at the time of a participant’s retirement, he said.

“It allows the plan sponsor to determine how much they would like to put into the profit sharing plan and to invest it as they and their adviser see fit,” Welsh said. “Then, at age 65, the account balance is annuitized. It is designed for those paternalistic plan sponsors to provide lifetime income without the cost of a defined benefit plan—the mandatory contributions, Pension Benefit Guaranty Corporation premiums and actuarial costs. They can dial up or down their contributions based on their profitability.”