PSNC 2022: Selecting and Monitoring Income Options

During the Retirement Income Choices pre-conference seminar at the 2022 PLANSPONSOR National Conference in Orlando, Michelle Richter, executive director, Institutional Retirement Income Council, talked about factors defined contribution plan fiduciaries should consider when selecting retirement income vehicles to offer to plan participants.

Richter said participant demographics play a role in whether plan sponsors want to offer a retirement income option and which option(s) to offer. For example, she said, plan sponsors should think about whether the workforce skews younger, and thus has time to ride out the market, or older, and thus has less time until decumulation.

Goals also help plan sponsors determine which income option(s) to offer, Richter said. For example, does the sponsor want to keep participants’ assets in the plan after retirement? Plan fiduciaries also need to consider whether the attributes they want in retirement income options match what their existing provider offers and can administer.

The level of involvement the plan sponsor prefers can help it decide whether to offer participants in-plan or out-of-plan income options, Richter said. She added that the level of involvement plan sponsors want or expect from participants can also help determine whether they want to offer an income option that is embedded in a target-date fund or qualified default investment alternative or one that participants will have to choose.

Richter shared that IRIC provides help for plan sponsors at https://iricouncil.org/evaluation-tools/.

When selecting and monitoring income options, plan sponsors need to understand the features of each product type, she said. For example, non-guaranteed in-plan solutions include stable value/capital preservation funds. Out-of-plan solutions include a plan-negotiated marketplace where participants can roll out a portion of their balance into a traditional annuity or a qualified longevity annuity contract.

Richter explained that all in-plan solutions have accumulation values associated with them. Options that are direct plan investments are group annuities. A contingent deferred-like annuity is a group annuity wrapped around an in-plan target-date fund that provides income after the TDF assets are depleted. This option is fully liquid, but if a participant takes a distribution, it reduces the lifetime income benefit, she explained.

Plan sponsors must also understand the trade-offs between income solution types, Richter said. These include things like the level of income provided and the level of distribution flexibility/liquidity. See “Retirement Plan Participants Need Help With Retirement Income” for more information.

When evaluating products from insurance companies, plan sponsors should look at the strength of the insurer and the costs versus the benefits of the products relative to other solutions, Richter said.

“Participants don’t understand something that has been dominated by the insurance space,” Richter told attendees. “Your job as a plan sponsor is to help participants and monitor the space to make sure the income options provided remain appropriate. Plan sponsors should also help participants understand the need for retirement income and the need to prepare for it.”