In-Plan Income Still Intimidates Plan Sponsors

Many plan sponsors say they want to learn more about retirement income solutions that can keep participant dollars in the plan for longer.

A new survey suggests defined contribution (DC) plan sponsors are holding out for additional safe harbor regulations before offering more in-plan retirement income solutions.

According to the “2015 Survey of DC Viewpoints,” DC plan sponsors believe a comprehensive safe harbor for in-plan retirement income solutions is still the “most needed” piece of regulation heading into 2016. Advisory industry professionals expressed similar views, the report explains, taking an interesting turn away from a primary focus on fees, technology and client service trends.

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“Concern about retirement adequacy across the system is keeping up industry professionals,” the paper says. “They would like plans to include a retirement income solution, and they favor a comprehensive safe harbor for such solutions.” 

Despite serious demand, it’s not likely the Department of Labor (DOL) will move quickly in this area—given the fact that it addressed the matter as recently as 2014 in formal rulemaking

According to the DC Viewpoints report, sponsors are pretty reluctant to break new ground. Primary points of concern include uncertainty around how plan sponsors may be held accountable for the actions of annuity providers once they have turned over participants’ assets—and the challenge of getting a good deal in the current interest rate environment. “Both plan sponsors and industry professionals selected the same top two reasons for not yet implementing a retirement income solution: (1) waiting for clearer fiduciary protection from the DOL and (2) waiting for products to mature and gain broader adoption.”

NEXT: Investment menus look a lot different

When asked directly, three-quarters of plan sponsors said they would be "more likely to offer an in-plan asset allocation option with a guaranteed income component if the DOL were to issue clearer fiduciary protection." The report suggests this percentage is "consistent with plan sponsors’ views in our 2012 DC Survey. Nearly half (47%) of plan sponsor respondents do not believe the regulatory developments in 2014 were enough and an additional 8% were not even aware that there had been some regulatory development in 2014 with respect to retirement income." 

The survey provides ample evidence of ongoing investment menu simplification, echoing a common theme heading into 2016: "Plan sponsors tend to offer over 11 investment options in their DC plans, with 38% offering 11 to 15 options, and 45% offering more than 16 options. Industry professionals tend to suggest fewer investment options. While a similar 38% suggest 11 to 15 investment options, 43% argue for 10 or fewer. This is consistent with the industry effort focused on streamlining investment menus."

Many sponsors further indicated they would be willing to radically shake up the investment approach used in their DC plan, with 42% suggesting they would be willing to use a menu of just three to four total investment options. "This is somewhat consistent with our 2012 survey results," the report says, "although the percentage not interested at all has increased by 10% (to 22%)."
 
Sponsors also remain focused on heading off fiduciary liability, with 68% indicating they would not work with an adviser who does not embrace the fiduciary relationship. Regarding important and ongoing money market reform from the SEC, 50% of plan sponsors and 56% of industry professionals believe plans will widely move to replace prime money market funds with Government or Treasury money market options. "The majority of respondents, both plan sponsors and industry professionals, believe there should be proactive disclosure to participants about gates and liquidity when retaining a prime money market fund in a DC plan."
 
Behind in-plan income solutions and fiduciary concerns, there is also strong focus (cited by 50% of sponsors) on managing fees and reducing all-in plan costs over the next 12 months. Still, "only 19% of plan sponsors indicated fees are keeping them up at night." One common undercurrent to the findings, the paper concludes, is plan sponsors' lasting interest in boosting plan participation and contribution rates, both for the sake of employee and employer. 

The research is from Rocaton Investment Advisors and Pensions & Investments. The full survey results are reported online here.

Is It Time to Increase the Retirement Age?

An analysis from an independent consulting demographer reveals that keeping standard retirement ages the same could spell economic ruin for world economies.

Joseph Chamie, an independent consulting demographer and a former director of the United Nations Population Division, says the Potential Support Ratio (PSR), or the ratio of the working-age population, ages 15 to 64, per one person 65 or older, “may signal economic stress with more elderly depending on fewer young workers to keep the economy humming.”

In a Yale Global Online article, Chamie reveals that the current PSRs for the older industrialized countries are typically less than six, with the U.S. PSR around 4. He notes that government pension programs typically set a normal retirement age above life expectancy. For example, in 1935 the United States established its Social Security program with a normal retirement age of 65, about three years beyond U.S. life expectancy at that time. In addition, he notes, even though women have a longer life expectancy than men, the standard retirement age is the same for both men and women.

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But, two factors have changed, Chamie says: over the past 50 years the world’s average birthrate declined from 5 to 2.5 births per woman within more than 80 countries, and global life expectancy at birth has increased from 47 years in 1950 to 71 today. By the year 2050, the PSR for the developed countries is projected to fall to two working age people per elderly person, Chamie says.

His analysis suggests that to maintain the current PSR, the retirement age would need to be increased by 2050 to as high as 80 in some countries. A retirement age of 72 would be needed in the U.S.

The implications of increasing lifespans and potential insolvency of government pension programs, as well as increasing health care costs and employees being asked to take more responsibility for providing their own retirement income, have many workers planning to work past normal retirement age. However, that plan doesn’t pan out for some, who may have to stop working for health or other reasons.

“[P]opulation aging raises critical questions about the viability of pension systems and health services for the elderly. As is often the case when confronting slow-moving, yet momentous demographic trends, some governments defer addressing the consequences to others in the distant future. Long postponements, however, increase the difficulty and costs of implementing policy steps necessitated by population aging,” Chamie writes for Yale Global Online.

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