As people prepare for retirement, they need to consider income options that can help assets last their lifetime, protect against market declines, hedge inflation risk and, most importantly, allow them to retire comfortably.
Eighty-two percent of employees say they would be willing to give up five percent or more of their salary if it meant having reliable income to help them live comfortably during their later years. Retirement security has increased in importance for almost 90 percent of participants over the age of 50 for the last three years2. Options such as in-plan guaranteed income solutions in employer-sponsored retirement plans are aimed at helping participants achieve financial protection and growth potential.
There are a number of solutions in the marketplace that address participant demand for the solutions. Some are investment-based, some are insurance based and some are a blend of both. The goal of a blended solution, one that combines both investment and insurance features, is to protect participants from down markets while providing income for life without losing access to assets. It is important for the plan sponsor community to understand the adoption, acceptance and future of guaranteed income solutions to help savers achieve a better retirement outcome.
The Department of Labor (DOL) has been very active over the past four years devising solutions to help participants grasp the concept and importance of converting their account balances into future streams of retirement income. The DOL is working on a proposed regulation that would require monthly income projections to be included on participant quarterly benefit statements.
Many providers already offer this service. With that in mind, participants are still faced with the difficult task of figuring out how much they will need in retirement and how to get there.
In addition to the income projection described above, the DOL indicated it will release a proposal to amend its “safe harbor” rules for fiduciaries when making annuities available as distribution options from a defined contribution plan. Plan sponsors often seek to satisfy a fiduciary safe harbor when one is available.
Today approximately 22,000 retirement plans offer guaranteed income solutions with between $2.5 and $3.0 billion in market value invested in these products. The number of plans offering guarantees has grown by 53 percent over the past two years, while the assets in these vehicles have risen 62 percent over the same time period.
Non-insured security/investment solutions can help participants achieve retirement income at a possibly lower cost with upside potential in the market, but without the guarantee that the money will last for a participant’s lifetime. They also offer no protection of retirement income in a down market.
Some traditional insurance solutions provide a guarantee of lifetime income that avoids market losses, but restricts the opportunity to capture market gains since the rate of return is guaranteed and fixed. These annuity solutions have been used both in and outside of retirement plans. The principal advantage of traditional fixed annuity contracts is that they guarantee income payments for the life of the participant and/or his or her spouse.
Guaranteed withdrawal benefits (GWB) are often combined, or “hybrid” solutions that consist of a mutual fund, such as a balanced or target date fund (or similar diversified investment vehicle), and a guaranteed withdrawal benefit feature, which is issued by an insurance company3. The contractual provisions include income for life, access to assets at any time (subject to plan terms) — during the accumulation period as well as the payment or income period — and protection of guaranteed income in down markets, while enabling savers to participate in rising markets. These solutions may be more expensive than other non-insured solutions.
There are several potential benefits to plan sponsors and to participants offering in-plan guarantee solutions:
Benefits for Plan Sponsors
- Investment options. Employers that are concerned with the benefit adequacy of their plans can look to guaranteed income solutions to help prevent the possibility of participants spending down their retirement savings too quickly.
Benefits for Plan Participants
- Institutional pricing. An in-plan guarantee investment option may receive the benefit of institutional pricing resulting in lower fees.
- Tax-deferral. When investing in an employer-sponsored retirement plan there is the additional benefit of tax-deferral on contributions inside the plan versus outside.
- Asset protection before retirement. Participants have the advantage of protections and guarantees during the “red zone” — the years immediately before retirement.
- Help to stay the course with savings. Downside protection helps give participants the confidence they need to stay the course during market volatility. By insuring their retirement balance against a down market, participants may be able to maintain a more appropriate level of equity exposure in their asset allocation. Better asset allocation may lead to better retirement outcomes for participants.
Because of the continued growth in adoption of these solutions and upcoming government regulations, in-plan guarantee solutions may have a more prominent place in the retirement plan industry in coming years. With the right education and knowledge of these solutions, plan sponsors may be better able to navigate their fiduciary responsibilities in choosing an in-plan guarantee to help create better retirement outcomes for their participants.