Building the optimal defined contribution plan design to support participant retirement readiness requires integrating flexible options to account for the consistent income stream workers will lose in retirement.

Guaranteed lifetime income features—annuity products—are useful to sponsors, but retirement experts recommend that sponsors instead focus on Social Security optimization, automatic features and other high-value and low-cost features to alter plan designs before moving on to annuities.

Financial insurance provider Unum Group is currently implementing guaranteed retirement income, using Fidelity Guaranteed Income Direct, to enable workers to convert all or a portion of their retirement savings—from a 401(k), 403(b) or 457(b) plan—into an immediate income annuity to provide consistent, pension-like payments throughout retirement.  Unum expects to have the feature implemented by end of the first quarter, says Ben Roberge, the company’s director of financial and retirement programs.

Yet reaching the execution stage was a multi-year journey, Roberge says, adding that Unum chose the annuity plan design to provide participants with retirement income options because it valued flexibility.  

It was “important to have different options, because all of our retirees have different situations, [because] some of them are going to have access to pretty significant guaranteed income already” from Unum’s frozen defined benefit pension plan, Roberge says.

Critical Design Question

Well before annuities are even on the radar, plan sponsors should give attention to plan design because participants want guidance from the plan, says Kerry Bandow, head of defined contribution solutions at Russell Investments.

Early in Bandow’s career, he used to hold employee seminars for clients to teach their participants about retirement plans “to get them to pay attention to their account, [but] they generally just want to be told what to do,” he says. “That’s why it’s so important to focus on plan design: because [research and] studies indicate that participants want the sponsor to tell them what to do through the design of the plan.”

Sponsors implementing plan design features such as permitting partial or periodic withdrawals, offering Social Security claiming and planning tools, and increasing the number of investment options of in-plan core menus each have to answer a critical question about adding retirement income options: How are plan sponsors going to enable their participants to “create a pension-like income stream after [they] finish working, with everything available [in savings] to primarily have enough money to live in retirement and not outlive your money?” says John Carter, president and chief operating officer of Nationwide Financial.

Among other offerings, the Nationwide Retirement Institute incorporates a sponsor education series focused on Social Security claiming strategies, Carter explains.

Plan Design Considerations

Sponsors interested in adding guaranteed retirement income options to plans must examine the demographics of their workforce before jumping into annuity products, says Roberge.

“I would encourage folks to take a look at what their population needs first and use that as your starting point,” he explains. “What problem [is the sponsor] trying to solve when it relates to guaranteed income? From there, explore all the different solutions, not necessarily with who is providing them, but what their solutions are addressing.”

Chris Littlefield, president of retirement income and solutions at Principal Financial Group, says the DC plan design alternatives he sees sponsors incorporate have focused on increased participant contributions and employer matches. Sponsors’ plan designs tactics tend to focus on the kinds of retirement benefits that make the company competitive as an employer.

“Are they offering immediately available vesting or a shorter vesting period for people that come in and get retirement benefits?” Littlefield asks. “What is their match like? Are they doing anything on profit sharing? And what are they doing for [new workers]?”

Assessing potential plan design changes by evaluating what others are doing is a key factor to incorporate, he explains.  

“There’s a lot of competition for CDL [workers with a commercial driver’s license] right now in the economy, and so you see a lot of signing bonuses and different ways to attract that kind of worker,” Littlefield says. “We can tell [sponsors] exactly what competitors like them are doing and how they might differentiate themselves in the market for talent from a benefits perspective: both a voluntary benefit and a retirement benefits perspective.”

Focus on Social Security

David Blanchett, head of retirement research at PGIM DC Solutions, agrees that plan sponsors should try to get the most value from automatic features and should make Social Security optimization planning tools available—specifically, a bridging strategy to enable participants to delay claiming the benefit, thereby receiving the maximum amount.

Although annuity products were the right plan design choice at Unum, other sponsors can extract optimal value and efficiency from low-cost features, which should be sponsors’ focus instead of adding annuities, Blanchett says.  

While some sponsors “are rushing to think about annuities” for their plans, “the most depressing statistic from our last DC landscape survey was only 13% of plan sponsors make available Social Security optimization planning tools,” he says. “That is the first place that someone should always go if they want more guaranteed lifetime income. Hard stop.”

Start Automatically

Doug LaMendola, senior vice president and the business development practice leader at retirement plan consulting and benefits administration firm USI Consulting Group, says plan sponsors should focus on automatic enrollment and automatic escalation to see the largest positive effects.

The asset size of a plan correlates to the sponsor offering auto-enrollment, according to the 2023 PLANSPONSOR DC Plan Benchmarking Survey. It found that auto-enrollment is used by 22% of plans with assets less than $5 million; 45% of plans with assets between $5 million and $50 million; 66% of plans with assets between $50 million and $200 million; 67% of plans with assets between $200 million and $1 billion; and 70% of plans with $1 billion or greater.

“Automatic enrollment, as well as automatic escalation … [are] what’s going to move the needle the most,” he explains. “Employer matching contributions are going to incentivize employees to save more.”

For sponsors, evaluating DC plan designs, including profit-sharing contributions, non-qualified plans and hybrid plans with defined benefit features, will add value to the plan, “but overall, [if the goal is] trying to get employees to save, automatic enrollment [and] automatic escalation [are] going to be what moves the needle most,” LaMendola says.

Sponsors mulling over plan design changes should first ensure that they have automatic features and education campaigns to teach participants how to become wise DC investors, says LaMendola.

The sponsors’ education program should focus on “not so much … trying to encourage employees to save—employees are going to be automatically saving because of those [features],” he says. “It is going to be more about ‘OK, now that you are saving, are you saving the right amount? How do you look at the match? How do you look at your account?’”

Blanchett sees the value of education programs but ranks other offerings as more important. He is “not as worried about education because, increasingly, individuals who should be in the default investment … tend to be, so the question is: What [investment] options are you including in the menu?”