Retirement Income Seen as the Next Phase for 401(k)s

The Pension Protection Act of 2006 (PPA) resulted in massive reform of the retirement planning industry, permitting a safe harbor for plan sponsors to automatically enroll participants into their defined contribution (DC) plan—specifically into a qualified default investment alternative (QDIA) such as a target-date fund (TDF), Cerulli Associates notes in June’s The Cerulli Edge – U.S. Asset and Wealth Management Edition.

With millions of Baby Boomers now retiring, Cerulli expects the next big development will be plans embracing retirement income. “We are seeing a DC industry in which plan sponsors and consultants are taking a degree of control away from the participant, with the intention of guiding plan participants to better decisions about retirement savings,” says Bing Waldert, a managing director with Cerulli. “As part of this continued innovation, converting the 401(k) plan to an income platform is a step in taking DB [defined benefit] market experience and applying it to the 401(k) market.”

Cerulli says the first step retirement plan stakeholders can take is to encourage plan sponsors to work to keep retired participants in their plan, to “embrace a more holistic view toward their participants.”

The next step plan sponsors can take to embrace retirement income is to work with their recordkeepers to permit retired participants to take systematic withdrawals from their savings. Cerulli notes that 87% of Vanguard plans allow investors to take only one-time, lump-sum withdrawals. “Structurally, this is a simple fix,” Cerulli says. “Consultants, recordkeepers and asset managers can work with plan sponsors to redesign the plan to offer a broader set of distribution options, including partial withdrawals or regular, systematic payments.”

The third step sponsors can take, according to Cerulli, is to offer TDFs that include retirement income options. “More than one-quarter (27%) of asset managers classify a managed payout as an attribute highly likely to be included in the next generation of target-date products,” Cerulli says. In addition, sponsors might turn to “managed payout funds [that] aim to provide steady retirement income to plan participants by achieving specific annual payout targets.”

Offering annuities in 401(k) plans is another obvious option, Cerulli says, but before this is likely to happen, the Department of Labor (DOL) will need to offer plan sponsors a safe harbor for the selection of an annuity provider. There is also a bill, the Increasing Access to Retirement Security Act of 2017, which the House introduced, that would clarify rules that provide a fiduciary safe harbor when selecting an annuity provider.

“Retirement market service providers should educate plan sponsors on the role of secure income in their participants’ retirement planning,” Waldert says. “This means making the DC platform more suitable for income, both from a flexibility and product standpoint.”