PSNC 2020: Creating Income Streams for Participants

Experts reviewed lifetime income options in defined contribution (DC) plans on the fourth day of the virtual 2020 PLANSPONSOR National Conference, noting that, while popular, annuity features are not the only kind of guaranteed lifetime income stream.

Panelists began by discussing the Setting Every Community Up for Retirement Enhancement (SECURE) Act and its annuity safe-harbor feature. While the SECURE Act requires employers to hold a thorough analysis on annuity features, many employers are concerned about portability, said John Doyle, senior retirement strategist at Capital Group/American Funds. Most employers don’t want to be locked into a recordkeeper, he explained. “There’s concern that when the next new shiny toy comes along, they’ll have to freeze the one they have and then move on,” he said. “This is why sponsors are saying, ‘Maybe we should wait until the solutions are better.’”

Additionally, Doyle said he is seeing more confusion when it comes to the differences between retirement and lifetime income. The SECURE Act addresses lifetime income as a secured guarantee of income, whether before retirement or during, he noted. Retirement income solutions, however, involve an array of solutions participants can use to create an income stream during their retirement years.

Joanne Jacobson, of counsel at Ivins, Phillips & Barker, described the difference between the two. “When I think of lifetime income, I think of guaranteed income. When I think of retirement distributions, it includes every facet of retirement features,” she said.

Many employers are interested in adding lifetime income features to their plans, especially as more keep their former participants/now retirees in the plan. One of the first actions a plan sponsor can take when adding a DC lifetime income option is ensuring the plan is retiree-friendly, Doyle said. Allow for ad-hoc and partial withdrawals, he added, so there are multiple ways participants can reach their money without incorporating a rollover. Because many recordkeepers will charge additional fees for an ad-hoc or systematic withdrawal, employers will have to work with their recordkeeper to ensure this design does not increase plan fees for the participant, Doyle explained.

The next step is to look at the investment options for the plan. More plan sponsors are considering a tiered lineup of options for participants that better fits different participant demographics, and many are adding an additional retirement tier. These selections are tailored to generate or deliver income streams to the participant, while being flexible. “The diversity of objectives is significant as people move to retirement,” Doyle said. “When you move into retirement, objectives vary significantly. It’s important to offer multiple solutions so that participants can fit these to specific investment portfolios.”

Jacobson agreed, adding that more variety equals better outcomes. “Each participant has different needs and desires, and communication is key so that individuals can make a reasonable choice within those options,” she said.

Along with tier options, Nick Nefouse, managing director, co-head of LifePath and head of investment strategy at BlackRock’s Retirement Group, mentioned that new, innovative tools, along with target-date funds (TDFs), will emerge as products that create lifetime income streams. For example, if a plan sponsor wants to offer systematic withdrawals, there are tools that offer a 20- or 30-year payout period. Depending on how paternalistic the plan is and how paternalistic it wants to be, TDFs may be a viable option for some. As more funds embed lifetime income, this may be one of the best options for most people, Nefouse said.

Aside from products, one-on-one communication, education about these products and defaulting mechanisms are all crucial, said Jacobson. Automatizing participants into an annuity-provided TDF or qualified default investment alternative (QDIA) is key to savings and distribution, she added.

The SECURE Act’s required disclosure provision is also important for employers and sponsors as they plan their strategies. Under the rule, employers will have to issue a disclosure on an annual basis that converts an account balance to a lifetime income stream. “The intention is that this would spur participants to save more money if they realize how far they would or would not grow,” said Jacobson.

However, she noted, a flip side to the rule is that it may turn participants off. If these notices are distributed to younger participants who have not accumulated as much savings, some may feel overwhelmed and choose to give up on saving. This is why it’s important to also have pieces of education along with these notices to emphasize that income will build as a participant progresses in his or her career. “Plan sponsors can provide additional information to these individuals on what they’re doing and what additional things they can be doing,” Jacobson said.