Use of In-Plan Income Solutions Poised for Growth

Is 2016 the year for guaranteed income options in defined contribution (DC) plans? The Institutional Retirement Income Council (IRIC) thinks so.

In a statement about trends to watch in 2016, IRIC says plan sponsors that have not recently revisited an in-plan solution will be more inclined to do so in 2016 since the landscape is very fluid and new solutions appear often. Plan sponsors have a fiduciary duty to review offered investments on an on-going basis, and as the aging of the population impacts the work force, more focus will be addressed toward the distribution phase, IRIC contends.                                                                                       

The council expects that comparative fact sheets will become more available to help review solutions so a plan sponsor can document the selection and monitoring process. IRIC itself is developing a fact sheet for benchmarking in-plan guaranteed income products.

Bill Charyk, president of the IRIC in Washington, D.C., tells PLANSPONSOR those that provide guaranteed products are trying to be more competitive, but progress is often limited by tough outstanding questions. For example, if someone left employment and had to discontinue putting money into a guaranteed income product, is there an equivalent IRA product the assets can roll into? If so, what are the associated fees going to look like? Providers are trying to make it so IRA fees will not be more than institutional pricing of in-plan options, he says.

There is lot of concern about portability, Tim Walsh, head of investment services at TIAA-CREF in Boston, notes. This is a misperception because most products are fully liquid, he says, so participants can port their balances to a new solution. However, TIAA-CREF thinks a better solution is to keep their money where it is; it will be like a defined benefit (DB) plan when participants get to retirement.

Another example of product innovation shared by Charyk is that participants in guaranteed options are frequently guaranteed a 5% return, but they may have to take out more than that to meet required minimum distribution (RMD) requirements. He says some providers are offering a guarantee that the return will be the greater of 5% or the RMD amount.

“Providers are seeing concerns with products and refining them to remain competitive,” he says.

Lew Minsky, executive director of the Defined Contribution Institutional Investment Association (DCIIA) in Washington, D.C., tells PLANSPONSOR this product evolution is one thing hindering the adoption of in-plan guaranteed income solutions. “There is always a fear of being an early actor when products are at a 2.0 in an evolution cycle that could go to 5.0,” he says.

Another one of the biggest things slowing in-plan solution adoption, according to Minsky, is a perception there should be a single solution, a silver bullet, that will meet all plan participants' needs. “I think that’s a misplaced view of how lifetime income works. Plan sponsors should consider a suite of solutions just like with other investments in the plan, for example, an in-plan QDIA plus several other options like insured or not insured solutions,” he says. “Having that view would be very freeing and make it easier to move forward.”

Minksy mentions that DCIIA issued a guide for plan sponsors about retirement income solutions, and all plan sponsors in the case studies in the report came up with different solutions that were right for them and their participants. “So, there’s no silver bullet; it could be a combination of solutions.”

Walsh notes that in TIAA-CREF’s 403(b) business annuities have always been in play, and 403(b) participants are comfortable with the products.

As there is a new emphasis on retirement income for 401(k)s, plan fiduciaries are trying to get educated about products, how they work and what fiduciaries should consider. Walsh tells PLANSPONSOR there is a need to educate them to overcome some myths.

Plan sponsors believe annuities are expensive, and retail annuities can be 200 to 250 basis points (bps), and have sale charges and surrender fees, but annuities used in retirement plans are less expensive. For example, TIAA-CREF annuities cost around 50 bps, Walsh notes.

Another myth is that annuities are all-or-nothing solutions. Walsh says, for some annuities, participants do not have to annuitize; the annuities act like mutual funds for accumulation, and participants can choose to annuitize for distributions. In addition, participants don’t have to annuitize all of their assets; they can partially annuitize, for example, for basic needs, discretionary spending or legacy spending.

Also holding up greater adoption of in-plan income solutions is a clear signal from the Department of Labor (DOL) that there will be more guidance coming, says Minsky. He notes that indication that there will be more guidance creates a perceived need of more guidance by plan sponsors.

However, Minsky, just like Walsh, tends to think existing guidance is good enough, and nothing else is needed—although Minsky notes it would be helpful to have more comprehensive guidance to help plan sponsors with decisionmaking. However, he adds, there is existing guidance that some sponsors rely on comfortably.

Walsh also notes there have been plenty of nudges from the government for plan sponsors to adopt lifetime income solutions. Guidance has been issued about safe harbors for annuity selection, modifying RMD rules to encourage adoption of qualified longevity annuity contracts (QLAC), and allowing deferred annuities to be included in target-date funds (TDFs).

According to Charyk, one challenge in selecting income products is there is no rating service that looks at these products yet, so plan sponsors have to find other products to which to compare. He says plan sponsors should look at the underlying investment vehicles in the products and compare with Morningstar ratings for fees and performance. Plan sponsors should also consider whether insurance carriers are in a good financial position, and make sure the investments in the product have been set up as a separate account not subject to creditors of the insurance company.

Walsh notes that risks are different now for retirement plans—the shift from DB to DC and concerns about Social Security have moved conversations from participation and savings rates to replacement income, longevity risks, withdrawal risks, inflation risks and cognitive risks. Plan sponsors should first get educated about income products, assess features of different solutions and make sure lifetime income solutions are part of the investment menu so retirement plan participants can create a holistic strategy for retirement.