Benefits September 30, 2024

Implementing Retirement Income Strategies

Plan sponsors shared the hurdles they face when evaluating retirement income options and implementing a strategy in-plan during a ‘Plan Sponsors in Conversation’ livestream.

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Regardless of whether a plan sponsor is first scoping out retirement income solutions or has been offering a guaranteed income product for several years, there are always challenges that come along with offering an in-plan solution.

During a recent Plan Sponsors in Conversation livestream, “Implementing Retirement Income Strategies,” two plan sponsors representing opposite ends of the spectrum in terms of experience working in retirement income spoke about how they have addressed, or are beginning to address, the retirement income needs of their unique participant bases.

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‘Unique’ Employee Base Could Consider Lifetime Income Options

Sarah Fry, the vice president and associate general counsel and assistant secretary at NACCO Natural Resources, said the company’s 401(k) plan serves 1,600 employees and is currently at a 99% participation rate.

Even before the plan offered automatic enrollment and implemented a sweep to get more people participating in the plan, the participation rate was at 97%. Fry said the culture of the company is unique in that it consists of many generational employees: people with family members that previously worked at the company, and workers encourage each other to participate in the retirement plan.

Fry also recently focused on providing eligibility for part-time employees, seasonal employees and interns. Because the plan’s recordkeeping fee with Vanguard is relatively low, Fry said it was not a problem for the company to pick up part-time employees and give them access to the plan, as well as the employer match.

She said next steps for the plan include looking into lifetime income options: understanding the options available and the cost of implementing such a solution. Fry also said she does not want to offer a complex product that is difficult for employees to understand.

“Right now, we’re trying to make our education program better on financial wellness in general,” Fry said. “So [for] whatever product we put into our plan, we want to make sure that it’s the best option for our employees, but then we need to make sure that they can understand it.”

Fry added that one of her biggest concerns is offering an insured product, like an in-plan annuity, that could cause people to lose money if they die earlier than expected and are not able to name a beneficiary.

While most insurance companies offer a death benefit option when purchasing an annuity, it typically comes at a higher charge up front.

Long History Still Requires Targeted Communication

On the other end of the spectrum, Ken Levine, executive director of global retirement strategy at RTX, formerly Raytheon Co. and United Technologies Corp., spoke about the company’s guaranteed income product—RTX Lifetime Income Strategy—which has been part of the plan for 12 years.

The guaranteed product is the qualified default investment alternative and functions like a target-date fund, but with a glide path that includes an increasing allocation to a secure income portfolio—the annuity portion—as the participant gets closer to retirement.

Levine said RTX’s 401(k) plan has $59 billion in assets and 215,000 participants; 13% of those assets are in Lifetime Income Strategy.

Levine explained that for the insurance portion of the strategy, participants are charged a fee—100 basis points once they start allocating money to the secure income portfolio—but participants are told this upfront and that this will guarantee them a stream of income for life.

At retirement, the participant must make the choice to activate the lifetime income benefit, which can be received over the individual’s life or can cover them and their spouse’s life. However, Levine said since Lifetime Income Strategy was launched, fewer than 200 participants have actually activated their income benefit. The participant must be separated from the company and at least age 60 to activate.

Similar to Social Security, the level of guaranteed income one would receive increases with age, but after age 70, there is no actuarial increase. Levine said it is in participants’ best interest to activate by age 70.

“We have started doing more targeted communications to the population that is over 60 and former employees, reminding them about the benefit,” Levine said. “We’re starting to see more and more people activating their benefit.”

He added that RTX is looking into automatically activating participants’ benefits if they reach age 70 and have yet to turn on the guarantee.

When participants are 15 years from retirement, they also receive communications that they are about to start phasing into the Secure Income Portfolio.

“When we initially introduced Lifetime Income Strategy in 2012, we overcommunicated it,” Levine said. “The focus is now meeting people where they are, at the … key points in their journey.”

Regardless of how well the benefit is communicated, Levine said the key is embedding the guaranteed income in the QDIA, because he believes it is the best way to get people started on generating lifetime income for retirement.

A recording of the full livestream can be viewed here.

Participants September 30, 2024

Unfunded Spending Spikes Affect Public, Private Employees Alike

Data from public sector employee households were remarkably similar to 2023 information covering the private sector.

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An average of nine out of every 10 public sector employee households experience spending spikes above their income, and nearly one-third of those households cannot fund these unexpected spending needs with income and cash reserves, according to new research.

Without a financial cushion, these workers were more likely to have increased credit-card debt or have taken a defined-contribution-plan loan, such as from a 403(b) or 457 plan. Higher credit-card balances are associated with lower retirement plan contributions, ultimately affecting public employees’ retirement readiness.

A new study from J.P. Morgan Asset Management, the Employee Benefit Research Institute, the Public Retirement Research Lab and the National Association of Government Defined Contribution Administrators showed that public sector employees with public sector retirement plans experience spending spikes at the same rate as private sector employees. The research defined spending spikes as monthly spending that is at least 25% above the previous 12 months’ median spending that cannot be covered by income. An unfunded spending spike is one that cannot be covered by income and cash reserves that month. The study is based on responses from more than 3,700 public employees.

The data build on the organizations’ joint research from 2023 that found spending spikes hurt 401(k) participants in the private sector. In both studies, nearly one-third of households’ spikes were unfunded.
That public and private sector employees with retirement plans had similar financial precarities surprised the researchers, says Sharon Carson, executive director and retirement strategist at J.P. Morgan Asset Management.

“We thought that we might find something a little bit different, because [public employees] have pensions and maybe that gave them a little more opportunity to have … emergency savings, but it seems like they have the same issues as the rest of us,” Carson says.

The study showed 45% of public employees making from $20,000 through $30,000 were likely to have unfunded spending spikes totaling more than $2,500 in a year, but almost 25% of study participants earning more than $100,000 annually also had unfunded spikes.

The study’s data identify a need for people to have an emergency savings fund to cover unexpected expenses. However, a key difference for public sector employees from private sector workers is the SECURE 2.0 Act of 2022 does not include an emergency savings provision for public sector defined contribution plans. The emergency savings provision in SECURE 2.0 only provides for $1,000 of penalty-free hardship withdrawals for public plan employees, the report stated.

Carson says it was likely an oversight by Congress to not include public employees in the emergency savings provision of SECURE 2.0. Amending the legislation to allow public sector plan sponsors to include an emergency savings provision would be “good public policy,” she says.

Even without an in-plan emergency fund provision, Carson says public sector employers can encourage their workers to create outside emergency funds, such as by offering to split direct deposit payments into separate accounts or offering small incentives to encourage workers to start saving. Targeted education and communication about debt management and budgeting provided to workers who are taking plan loans may help as well.

Conventional wisdom is to save three to six months of expenses in an emergency account, but Carson acknowledges that figure can be overwhelming. Chase Bank data show rainy-day savings may not need to be that large, and balances could be closer to two to three months of after-tax income.

“It’s just important to get people started, and then it can build from there,” Carson says.

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