How Sponsors Should Consider Different Lifetime Income Options

For sponsors and participants considering retirement income options, such as systematic withdrawals and annuities, there many evaluations to make. These include the fiduciary duties of plan sponsors under the Employee Retirement Income Security Act and which options best suit the needs and preferences of participants.

ERISA and Fiduciary Duties

Despite all the new products available to plans, “underneath it all, the same standards apply: prudence and loyalty,” says David Levine, a partner in the Groom Law Group, referencing the core fiduciary obligations under ERISA.

The retirement world is constantly evolving, and “there are always new solutions as people try to address what people perceive as room for enhancement,” Levine says. Sponsors should evaluate the direct and indirect costs, the outcomes and the recordkeeping requirements of any option they are considering.

When it comes to fees associated with lifetime income products, sponsors should ask themselves, “in light of these fees, are the benefits to the plan and participant worth it?” There is no right or wrong answer, necessarily; a fiduciary just needs a prudent process for deciding and a “basis and rationale” for the final choice.

Levine adds that sponsors are not required to offer features such as managed accounts or annuities, so there is no need to feel overwhelmed by the large volume of options. Sponsors should consult with their adviser or vendor about which options might be best for their participants, and fiduciaries should be sure they understand any option before selecting it and should be ready to commit to continuously monitoring the prudence of the product, since fiduciary duties are ongoing.

Guaranteed and Nonguaranteed Options

Laurie Lombardo, a vice president at Voya Financial, says “there is a lot out there for participants to choose from,” but retirement income products broadly fall into guaranteed and nonguaranteed options. According to Voya customer surveys, most participants are interested in both categories.

Guaranteed lifetime income options will essentially always be some kind of annuity or other insurance product, Lombardo explains: “An insurance company will be on the hook for making the payments to the participant.”

A guaranteed option can involve directly investing into an insurance product or later transferring plan funds into an annuity that provides a stream of income to last for the rest of the participant’s life.

Some guaranteed lifetime income options are found embedded into target-date funds, such as BlackRock’s LifePath Paycheck TDF, which moves assets over to lifetime income as the participant ages past 55 years old.

A nonguaranteed option typically involves structuring withdrawals from a participant’s plan balance such that the participant continues to get a regular income, though it only lasts as long as the funds do. In the absence of a systematic withdrawal feature, a participant is left to withdraw funds manually and irregularly, which can make budgeting more difficult.

Lombardo says that according to Voya’s data, only 42% of plan sponsors offer systematic withdrawals. Given the feature’s relative simplicity, it is “probably one of the first things a plan sponsor can do toward meeting the retirement income needs of their participants.”

Between these two categories, there is not much of a gap in popularity, Lombardo says, but “there is a gap in utilization,” because “participants are not aware of all the options.” She says sponsors should also invest in educational tools to help participants decide which options are best for them. “Participants won’t go out and buy them; they need to understand them,” she says, and working with financial professionals can make a big difference.