In-Plan Retirement Income Products Benefit Participants, Plan Sponsors

Guaranteed income solutions provider Prudential Financial says adding guaranteed income solutions in defined contribution (DC) plans can help bring financial security within reach of employees, helping to reduce the amount they would need to save by as much as 36%.

A Prudential Retirement paper, “On the Road to Financial Wellness, Lifetime Income Is Key,” says offering income that is guaranteed for life is a key component to participant financial wellness.

While a variety of options have been available for some time, in-plan guaranteed lifetime income solutions are not being used as much as they could. Fewer than half of plan sponsors offer a retirement income solution as part of their defined contribution plan—typically a 401(k)—and only one-fifth of those offer a guaranteed income product, Prudential says.

“The fear of outliving one’s retirement assets is a top concern for many employees as they contemplate retirement. A guaranteed income solution can help assuage their fears about longevity risk and help them weather market volatility,” says Douglas McIntosh, vice president, Full Service Solutions at Prudential Retirement.

Employers who add a guaranteed income option to their 401(k)s have the potential to experience positive outcomes, too, Prudential contends. When employees feel more secure about retirement, they are more likely to retire on time. A 2017 Prudential study found that a one-year increase in average retirement age results in an incremental workforce cost of over $50,000. Also, retirees with lifetime income are much more likely to keep their assets in-plan—helping plan sponsors retain the cost benefits that come with scale.

Prudential notes in the paper that in-plan guaranteed lifetime income solutions range from immediate fixed annuities, which are purchased at retirement for immediate annuitization, to guaranteed minimum withdrawal benefits (GMWBs), which can be purchased at any time and activated at a set age. It advocates for GMWBs.

According to the paper, some advisers and plan sponsors have shied away from offering guaranteed lifetime income in DC plans, believing there to be a lack of regulatory guidance. But, Prudential reminds plan sponsors and advisers that the Department of Labor and Treasury have relaxed required minimum distribution (RMD) rules, so participants can purchase qualified longevity annuity contracts (QLACs) and have provided guidance for pairing annuities with target-date funds (TDFs). In 2014, IRS Notice 2014-66 provided guidance intended to expand the use of income annuities in 401(k) plans, particularly within target-date funds (TDFs).

In 2015, the DOL released Field Assistance Bulletin 2015-02, which reiterated and clarified the principles set forth in the annuity safe harbor regulation (2008) relating to plan fiduciaries’ responsibilities and liabilities in the prudent selection of an annuity provider.

Also, in late 2016, the DOL issued an information letter stating that a DC plan could prudently choose a default investment for the plan that includes lifetime income elements.

The perceived complexity of in-plan guaranteed lifetime income options has also been a stumbling block for some advisers and plan sponsors. They fear that the product is too complex for participants and may harm plan participation rates. Prudential says that has not been its experience.