Benefits July 3, 2023

The Retirement Income ‘Low-Hanging Fruit’ Option Open to Plan Sponsors

Plan sponsors and their retirement industry providers can take steps toward facilitating greater coordination and use of systematic withdrawals by plan participants.

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Art by James Yang

Retirement income solutions have started to mature, yet many plan sponsors remain in the planning stage for incorporating into retirement plans options for participants to spend down their account balances or preserve and grow assets. Work is still needed to help participants access retirement income via both insured products and nonguaranteed lifetime income options.

Plan participants at MRIGlobal, a nonprofit scientific research institute in Kansas City, Missouri, can use systematic withdrawals from their accumulated 403(b) plan account balances, coordinating with the recordkeeper Empower, says Monica De Agostino, MRIGlobal’s human resources manager. 

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“Empower offers [MRIGlobal] retiring employees a range of choices,” she says. “One option is periodic payments, where retirees can receive regular payments based on the frequency they prefer. This could be on a monthly, quarterly, semiannual or annual basis.”

For retirement income, MRIGolobal also offers participants an in-plan managed account service, as of 2022. Plan participants also have the option of working with a financial adviser through benefits specialist CBIZ Inc., De Agostino adds.   

“To help retiring employees figure out their retirement income strategies, we always recommend that they consult with their financial adviser or connect with an Empower retirement consultant to provide personalized advice based on each retiree’s unique circumstances,” she says. “They can explore various retirement income options that fit their needs.”

Retirement Income Thinking

One plan-design option available to sponsors to help participants create a paycheck in retirement is adoption of systematic withdrawals. But this option requires greater coordination between disparate retirement ecosystem partners to make it work.

“One reason [for] systematic withdrawals … being the low-hanging fruit option [available for retirement plans] is that it comes [down] to the collaboration of all the players, and that goes for all retirement income,” says Jason Shapiro, director of consultant relations at Columbia Threadneedle Investments.

Working with defined contribution plans, Shapiro notes, “I can’t think of any sponsors that I’m talking to today that don’t offer systematic withdrawals, [but] the usage is very low.”

However, for plan sponsors to successfully focus on incorporating different account decumulation options “takes a concerted effort by recordkeepers custodians, managers, plan sponsors [and] consultants to make sure that this is easy for participants,” adds Shapiro.

Plan sponsors offering systematic withdrawal facilitates participants to draw down assets from their account balance gradually, allowing workers to spend from their account balances while also retaining the benefits of enrollment in a retirement plan with institutionally priced investments.

But systematic withdrawals are not a perfect solution and may require work to make them a better option, advises Shapiro.

“Often [there is] a systematic withdrawal feature that lives somewhere on a recordkeeping platform, but it’s not directly tied into the open architecture options in the plan,” Shapiro says. “The investments, depending on the recordkeeper, don’t even live in the same module, [so the participants] have to exit [the] retirement platform [and] go to a different retirement income or wealth management platform,” he said.

Kerry Bandow, head of defined contribution solutions at Russell Investments, agrees that a change has occurred in the retirement income conversation.  

“I’ve been [working] in DC now 30 years, and it feels like we’ve talked about retirement income for 29 and a half years, and there’s been almost no movement at all. I think it feels different now,” says Bandow.

He urges plans to “do something, do [annuities], do anything. We still find DC plans in which the only choice for distributions is lump sum distributions, and so updating the plan document to allow for at least periodic distributions through retirement is a first step.”

With a myriad of insured options providing guaranteed lifetime income and non-guaranteed options aiming for growth and preservation, many plan sponsors are examining how to proceed, but some are struggling with decisionmaking, or fear of missing out on better options to come.

Plan sponsors are likely to only achieve adequate take-up of such options if retirement income and decumulation are fused to the plan’s qualified default investment alternative and added to the glidepath of target-date funds, says Bandow.

For plan sponsors looking at ways to incorporate decumulation options, one option is dividing workers into different categories of investors and assigning a specific solution to each group, he says.  

“A particular client segmented their participants and ultimately chose a decumulation strategy for these groups: target-date fund investors, managed account investors and core fund investors [those that chose between the active and passive options rather than TDFs],” he says.  

A brief interlude of research

Most DC plans have a lot of work ahead of them to design decumulation options and retirement income features into their investment offerings and get options into their plans: 15% of plan sponsors are currently evaluating products or implementing a retirement income solution, according to research published by PGIM Investments in April.
Only 37% of surveyed plan sponsors said they allow participants to take systematic withdrawals at retirement, the research found.

PGIM Investments put hard numbers to the limited steps that many plan sponsors have taken to incorporate additional easily accessible tools, including Social Security optimization tools and retirement readiness objectives to measure participants’ progress, along with facilitating greater attention by participants to setting up decumulation or retirement income options earlier in their careers.

More than 60% of plan sponsors have not yet taken steps to increase retirement readiness for participants; 37% allow participants to take systematic withdrawals; 27% set retirement readiness objectives for participants and measure results; and 13% provide a Social Security optimization tool for participants, the research found.   

Meanwhile, 27% of plan sponsors said they are not currently interested in offering a retirement income solution.

The end starts at the beginning

Lucas Hellmer, director of benefits at Salas O’Brien, a construction engineering company in Irvine, California, says the company’s plan is experiencing its own challenges because participants have a wide variety of needs.

“Individuals are unready for retirement,” which in turn effects the approach to retirement income and decumulation options, he says.

Some participants are not at an optimal level of readiness for retirement, and another significant population is pursuing a phased approach to retirement, Hellmer says, while some participants at the end of their careers have not accumulated sufficient account balances.

“We have individuals [at the company] that are in a phased retirement approach—they are at retirement age and want to continue working well into their 70s, 80s—and [want to] continue to work for our company, which is great, [because] we’re retaining those resources within our organization,” Hellmer says. “While there are some that are doing very well, there are some [individuals in the plan] that unless they have other retirement plans … they’re not going to be able to retire [comfortably], even with Social Security.”

Benefits July 3, 2023

AI Has Potential to Improve Plan Design, Expand Retirement Plan Access

Users may not be able to rely on artificial intelligence for financial advice yet, but technological developments are already making plan sponsors more efficient.

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Art by James Yang

In the past few years, a retirement plan would be considered tech-savvy if it gave employees savings nudges on their birthday or hire date.

That’s changing—fast.

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Tech-forward retirement plan providers, recordkeepers and third-party administrators are using artificial intelligence—including machine learning, large language models and even ChatGPT—to digitize and automate mundane plan administration tasks to reduce plan sponsors’ burdens and costs. Not only does it mean less work for plan sponsors, it is also making it easier for employees to save.

It’s necessary, too, as the SECURE 2.0 Act of 2022 mandates actions such as automatic enrollment and automatic escalation, which will require software updates.

Newer and smaller retirement plan providers are using technology to get a foothold in the industry and service more small- and midsize employers. In the future, technology may ease employee plan access, tailor investment offerings and perhaps offer advice, although sources interviewed for this story say technology is not there yet. The human touch is not going away, but it may just get more efficient.

Where We Are Now

Rakesh Mahajan, chief revenue officer at Human Interest Inc., a full-service 401(k) and 403(b) provider for small and midsize businesses, says digitizing and automating much of the retirement plan administration eliminates paperwork that was common even a few years ago. That efficiency makes it easier, faster and cheaper for plan sponsors to roll out benefits and simpler for employees to use. For new employees, accounts and investments are set up with a few mouse clicks. Eventually, he would like to make that even simpler.

“My aspiration is to have a magic button for everything,” Mahajan says.

Kevin Gaston, director of plan design consulting at Vestwell, says taking care of the administrative burden for plan sponsors also helps reduce their legal and compliance risks when offering the benefit, and technology can also flag other potential risks, such as alerting plan sponsors to late deposits or other issues.

On the Horizon

Chad Noorani, a retirement plan consultant at Benefit Financial Services Group, has experimented with using ChatGPT to gather compliance information and create a framework for blog posts that he would eventually rewrite to include his own resources and links. AI could help small retirement planners like Noorani become more efficient by, for example, writing code and personalizing materials to meet client needs. Efficiencies could allow him to scale his business and spend more time with clients.

“Business development may get easier; it may help you prospect better,” Noorani says, noting such automation could eliminate irrelevant discussions, such as pitching services that a plan sponsor may not need or want.

In the same vein, some retirement plans offer one-size-fits-most investment options, such as target-date funds, which may not be suitable for employees who have outside assets or competing savings goals.

Dani Fava, group head of product innovation at Envestnet, says machine learning and predictive analysis tools can make retirement plan design more customizable and help plan advisers create better savings strategies, even when employees have not entered all of their information. Envestnet’s Insights Engine uses machine learning to sift through its data and that of other connected data providers, plus an employee’s unique information, to find patterns. It can predict when a participant has outside assets and what type of assets with more than 75%accuracy. When Generative AI is included in the design of a retirement plan administration system, the toolcan learn from plan data and may be able to create more accurate or tailored offerings, she adds.

In coming years, plan sponsors are likely to have more participants who have more retirement savings, who will need greater support, Fava says. Generative AI could be used to create an asset allocation from the plan investment menu or identify the right level of savings without employees having to answer the usual risk tolerance questions.

Fava says this technology could be available in about a year, but getting regulators and plan sponsors comfortable using it is probably three to five years away.

Gaston says AI and fintech could expand access to robust savings tools, even at smaller businesses and for employees at all pay levels. “We look at it as a force multiplier, downwards and outwards.”

He says while AI’s effect on performance will be closely followed, he thinks AI could be used to offer investment guidance, such as spotting portfolio risk that is out of balance or finding new ways to increase savings. Gaston sees AI’s greatest benefit as improving financial wellness and finding that next dollar of savings, more than affecting asset management.

Industry sources reiterate that retaining a human touch will be important because of the emotions tied up with money. Humans will need to give AI boundaries, especially in a field of complex legal and rigorous compliance regulations. “You can tell Chat GPT to make me the best plan design. … It may not be fair or equitable, so it’s not good,” Gaston says.

The Far Future

Giuseppe Sette, president and co-founder of Toggle AI, says his firm is teaching large language models how to invest, educating the models  on financial concepts that will allow them to better understand and analyze investment problems. In the distant future, plan advisers might be able to assign some asset management decisions to AI, which he dubs an evolved version of “robo-advisory.” He also considers creating a drawdown strategy in retirement “another incredibly fertile opportunity” for AI.

However, Sette cautions that there is no room for error when using AI in finance or retirement planning because of the strict regulations and compliance. After all, AI still has a propensity to “hallucinate,” or make up answers, or it could identify investment opportunities using incorrect or inaccurate criteria.

To avoid those problems, Sette says AI developers would need to narrow the intent and type of questions a user asks an AI-enabled tool, so that the AI system can understand what the user wants. Critically important is establishing safeguards to control what the model says back to the user.

Relying on AI for financial advice remains some time off, but Sette is clearly bullish on the progress already made.

“It’s easy to get Pollyannish, because it’s very likely the most exciting technology we’ve seen [in] the last—I don’t know, ever,” he says.

 

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