Plan Sponsors Are Mulling Retirement Income Options

Plan sponsors have not pursued massive adoption of retirement income options for participants following passage of the Setting Every Community Up for Retirement Enhancement Act, according to industry experts.

The SECURE Act created a new fiduciary safe harbor for selecting an annuity provider. Many players in the retirement industry anticipated that this would pave the way for greater adoption of in-plan retirement income options, but that has not been the case.

Plan sponsors are taking a deliberate approach as “a fair amount of healthy discussions about retirement income,” are underway, says Jeff Cimini, senior vice president, retirement product management, at Voya Financial. “We’re seeing some clients moving towards the adoption of solutions,” he explains.

When plan sponsors consider retirement income options for participants, they’re more likely considering “different investment choices that allow either a participant or a managed account provider to combine different investment strategies that produce an asset allocation specifically for those drawing income,” Cimini says.

With these solutions, retirement plan participants enrolled in a defined contribution plan can choose to annuitize part or all their accumulated retirement savings to account for longevity risk. Participants can also choose from among managed payout solutions—while staying in-plan after retirement—or systematic withdrawals, to create a lifetime income stream.

Many participants who have accumulated significant savings remain anxious about outliving their savings and many see in-plan retirement income options favorably, yet adoption has not spiked, says Jennifer Doss, defined contribution practice leader at CAPTRUST. “Not a lot of action, a lot of discussion, a lot of education—that’s the state that we’re in right now,” she says.

Plan sponsors’ questions have increased since the beginning of 2021, Doss adds. “We got a big uptick in questions around what products are out there, what products are available at different recordkeepers, what types of solutions and services are both offered at the recordkeepers and not just from an investment perspective—what kind of services are offered or more geared towards retirement income for retirees,” she explains.

Data from the 2021 PLANSPONSOR Defined Contribution Plan Benchmarking Report shows that 35.4% of plans overall offered no retirement income option in 2021, compared to 44% of plans that did not offer any such solution to participants in 2019. The 2021 figures show that large and jumbo plans—with assets of $1 billion or more—are more likely to provide a lifetime income option, compared with plans with assets of $1 million or less.

According to the 2021 report, systematic withdrawals is the most prevalent retirement income solution offered (39.3%), and out-of-plan annuity purchase is the least prevalent (4.2%). In-plan insurance-based products that provide guaranteed income—annuities, Guaranteed Minimum Income Benefit, Guaranteed Minimum Withdrawal Benefit, and other guaranteed products—were used by 7% of plans overall in 2021, compared to 11.1% in 2019.

The figures might indicate a trend that plan sponsors are looking at broad ways to include retirement income solutions in their plans, which Cimini says is reflected in conversations with plan sponsors. “We’re having discussions about supporting pre-retirees and retirees who’d like to stay in the plan, [who want] the ability to generate income from the plan, but considerations include more than just the guaranteed [products],” he says.

“We have a lot of clients that are thinking about what we’ll call ‘intelligent’ or ‘smart withdrawal’ programs, tools that help participants with systematic withdrawals,” Cimini says. “We’ve seen an increase in the consideration of what we’ll call ‘the retirement sleeve,’ which is multiple choices of investment programs that offer different ways to generate income.”

He adds that plan sponsor clients are targeting retirement income products to participants that are at or near retirement.

One trend is plan sponsors offering tools to help participants understand their lifetime income needs and whether savings are sufficient to meet those needs.

Doss says a trend that would lead to greater adoption of retirement income solutions is for plan sponsors to default plan participants into a retirement income product or include an income component in qualified default investment alternative. “If we see adoption in the future, it’s going to be integrated into the QDIA,” she says. “What we’ve learned historically is that if you offer it as a standalone option that just doesn’t get the uptake and the desired results that that you would want as a plan sponsor.”