Implementing Retirement Income Strategies

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.

‘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.