Selecting Retirement Income Options a ‘Deliberate’ Journey

Plan sponsors considering adding retirement income features to their defined contribution plans are likely embarking on a multifaceted journey during which they will engage their retirement plan and plan committees, investment consultants, advisers and participants to help evaluate the different options.

Financial insurance provider Unum Group is currently making this multi-year journey and has plotted to implement comprehensive guaranteed retirement income and nonguaranteed options that will provide its retirement plan participants with choices.

“[Participants] don’t want us to make their decisions; they want us to give them options,” says Carl Gagnon, Unum’s assistant vice president for global financial well-being and retirement programs. “Having in-plan options, as well as retail options, is something they can look [at] and use as a comparison tool, be a smart shopper on it. That’s part of the driver [of the process] is that we want to make sure that employees have choices, both in-plan and out-of-plan.”

Adding decumulation options takes time and deliberate thought from the plan sponsor and its partners, sources concur, offering a rough road map for how plan sponsors can educate their committees and participants on the different retirement income options.

“Definitely taking a tailored, staggered approach with our participants will help with education,” says Ben Roberge, director of financial and retirement programs at Unum.  

Start With Flexibility

In 2021, Unum Group added to its 401(k) plan Fidelity Investments’ managed retirement funds—a systemic withdrawal plan—as an option for participants. The Fidelity program’s flexibility was key, Gagnon explains.

For a plan participant who is close to retiring or who wants to start decumulating, the funds offer “this withdraw solution where you can invest in a couple of managed retirement funds that are like reverse target-date funds,” says Gagnon. “There are four series that are based upon [the year when the participant turns 70]. You can move your assets from where you’re currently invested in the 401(k) plan into these managed retirement funds and use that to draw down. You don’t have to move all of it, but you can move a lot, and there’s a tool that allows people to work out how much they want to withdraw on a regular basis, whether it’s monthly, quarterly, semiannually or annually.”

Having added a systemic withdrawal option, the next phase for Unum was to begin adding guaranteed products.

The company last year the addition of a guaranteed retirement income feature, given that the company’s defined benefit plan was frozen 10 years ago, explains Roberge.

“We also realized that we had a need for an immediate option for a certain population of our retirees as well,” Roberge says. “So when evaluating the two, we decided that more than one guaranteed solution was actually the right fit … in combination with a nonguaranteed solution that we already had in place.”

Don’t Rush the Evaluation Process

At Unum, the evaluation process involved investment and bringing on additional support from an independent consultant to run a request for proposal specific to decumulation features.  

“We took a very deliberate, slow approach to set the landscape of: ‘Here are all the different options in-plan, out-of-plan. Here are the different types of annuities that are offered,’” Roberge says. “Then we brought forward a number of solutions from the RFP that we thought, based on cost and structure, would fit well into our plan for our demographics.”

Unum selected finalists, brought them in for presentations to the committees and held a separate debrief meeting to select a recommendation that made the most sense for the plan.

Denis Monty, vice president of wealth solutions, planning and strategy at Voya Financial, says the process Unum used is becoming more common. Voya is seeing “more references to retirement income in RFPs we receive,” he says. “[Plan sponsors] are interested, they’re investigating, but it’s not yet a critical part of their retirement plans.”

Proceeding deliberately is wise for plan sponsors, according to Michelle Richter-Gordon, executive director of the Institutional Retirement Income Council and co-founder of Annuity Research & Consulting.

Rather than begin with product-specific parameters, “the conversation needs to start with: What services does the plan need?” Richter-Gordon says. “What part of the population is it looking to address? Is it seeking help during the accumulation phase, maybe because it has long-tenured employees?”

Ask—and Answer—Some Tough Questions

At Unum, one key element of the journey has been shifting its philosophy to permit participants to remain in the plan once their active employment ends.

“From the retirement income-solution, our philosophy—10, 15 years ago—was always, ‘Keep your money in the 401(k), and when you [have] left the company, move it and do something on the retail, investment or annuity side,’” Gagnon says. “We’ve tipped the scales a little bit and gone toward building the drawdown [where] we allow people to draw down their money on a regular basis, and now we’re building the annuity side.”

David O’Meara, a senior director of investments and the head of defined contribution investment strategy at WTW, agrees that the plan sponsor must come to a decision after taking a step back to determine “What do they want to provide to participants? What do they see as the role of the employer?”

Attitudinal shifts have extended from legislation—the Setting Every Community Up for Retirement Enhancement Act of 2019 and the SECURE 2.0 Act of 2022—to reactions based on the sheer demographic fact that thousands of Baby Boomer workers are retiring each day.

Voya’s Monty says that although the momentum of positive conversations with plan sponsors was disrupted by the COVID-19 pandemic’s economic effects, “we’ve definitely seen an increase in the conversations around it,” as talks with plan sponsors are recently “picking up, and I think there’s a number of catalysts.”

“We’re seeing an increase in conversations, but not yet full commitment to adding retirement plan features,” Monty says. “We’re seeing it, but it has not yet really turned a corner or reached the tipping point, from our current experience.”

Plan sponsors continue to have concerns about selecting the right solutions for their plan, and although the safe harbor for annuity selection provided by 2019’s SECURE Act has provided some relief, “they’re still looking for something that helps them make those decisions,” Monty adds.

Take It Step By Step

Clients adding decumulation options have successfully turned on the “simple steps first,” including the option for participants to draw down their balance in a withdrawal plan or use partial withdrawals and then perhaps an annuity brokerage window, explains O’Meara.

“Any beliefs that [the plan sponsor] may have related to guarantees or nonguarantees, understanding their population, the longevity of their population, what type of people they are, and pulling that together generally directs them into, ‘OK, here’s how we should be approaching this problem. Here are the types of solutions that we might be interested in,’” O’Meara says. “Most of the time, that leads to a re-evaluation of the plan provisions, making sure that they’re making it an option for people to stay in the plan.”

Voya’s Monty says his firm has observed clear trends as plan sponsors pursue retirement income options, starting with education for participants in which they learn about retirement income, its options and how it can be used.

“The second component is tools and experiences, drawdown [options], the ability to model things. What if I have plans in retirement to purchase a second home, travel, etc.? How do I model that out?” Monty says “Third is products and solutions, both guaranteed and nonguaranteed. So we’re seeing definitely a growing interest around those three components.”