In-Plan Lifetime Income

Our sister brand, PLANADVISER, held its national conference this week in Orlando. As part of one panel, a group of experts discussed the latest retirement income planning trends in the defined contribution (DC) retirement space.

Panel moderator Jeb Graham, retirement plan consultant and partner at CapTrust Financial Advisors, asked the audience to supply a few numbers for the conversation. A quick poll showed very few retirement specialist advisers felt their plan sponsor clients would be open to wider in-plan income use, and slightly more “are aggressive about offering in-plan retirement income options to participants.”

Panelist Jan Gundersen, managing director for product management at TIAA-CREF, suggested this is because DC plan sponsors have “traditionally only thought about accumulation—nest-egg thinking.”

“Today we are clearly seeing a demographic shift, and so many people are looking for guidance on how to spend money in retirement, participants especially,” Gundersen said. “For this to really take off we will need more plan sponsor interest, and that will only come when solutions become easier to understand, and they must fit with plan sponsor’s fiduciary role.”

Panelist Glenn Dial, head of retirement strategy for Allianz Global Investors, agreed with that sentiment, noting that interested parties should not dismiss in-plan income for DC plans. Portability challenges are very real, he said, but they can be addressed by skilled advisers and investment providers. 

“It’s not very popular today, that’s true,” Dial said, “but to get a sense for the pent-up demand that is out there, it helps to look backwards and consider the appetite for and usage of in-plan income during the earlier defined benefit [DB] paradigm. It was 100%. Everyone in the DB plan got guaranteed income for the rest of their life, and most people were just fine with that. I think the interest is clearly still there.”

Michael Gordon, another panelist and head of retirement insurance and the Strategic Solutions Group at BNY Mellon Investment, agreed, advocating for in-plan annuitization and other controlled withdrawal strategies that draw from the DB approach.

“We used to look at 4% as a safe annualized withdrawal rate for those people who wanted to control their own spending and who resisted annuitization—that meant you could spend each year $30,000 or $40,000 of every million dollars saved,” Gordon said. If you look at it this way, annuitizing a million dollars can be a pretty good deal when you consider the added guarantee. “It will also depend somewhat on the market and interest-rate conditions when the annuity in transacted, of course.”

NEXT: More DOL guidance is unlikely

Gordon said he looks forward to more innovative in-plan income solutions that can take into account DC plan participants’ home equity and other outside assets, because “any realistic solution here is going to have to account for both in-plan and out-of-plan assets. There are trillions of dollars outside DC plans that we can help people control and spend effectively.”

As Dial explained, part of the low pickup problem for in-plan income is regulatory: Most plan sponsors cite fears of fiduciary liability and uncertainty around how to pick and monitor annuity providers. However, in discussions with the Department of Labor (DOL) and the Treasury, he said, “they’re surprised that we have cold feet on advocating for in-plan income and that sponsors feel they don’t already have the fiduciary protections they need. They think that gave us a safe harbor already, and indeed they did. They want to know, what else do you think you need? They think they have given enough clarification and guidance.”

Gundersen concluded the panel by observing “there is no single problem in distribution the same way there is in the accumulation phase.” On the accumulation phase, plan sponsors can solve problems for many people at the same time, for example through auto-enrollment and auto-escalation.

“But with DC plan asset distribution, the risks are very different for different individuals,” he said. “Individuals’ priorities and preferences matter so much more on the spending side. How much of your income do you want to come from guaranteed sources? How much risk are you willing to carry for potentially more purchasing power later? These are all very personal situations, so the one-size-fits-all answer ‘save more’ is not going to apply.”