DC plan exec survey finds interest in retirement income

But most see little value in new rules on fee disclosure

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Growing: Christopher Lyon was surprised by how many plan executives are willing to offer in-plan income options.

Defined contribution executives express a surprisingly strong interest in retirement income options and an overwhelming ho-hum on the value of new fee disclosure rules, a survey by Pensions & Investments and Rocaton Investment Advisors LLC shows.

“The percentage of respondents who would be inclined to offer in-plan (retirement income) solutions was higher than we expected,” Christopher Lyon, a partner at Norwalk, Conn.-based Rocaton, said in an interview.

But their interest comes with a major caveat: When asked if they would be more likely to offer an in-plan solution if the Labor Department issued “clearer fiduciary protection,” 73% of plan executives said yes.

“If the DOL formalizes a safe harbor, that could go a long way in convincing large plans” to offer an in-plan option such as a guaranteed income or annuity component, Mr. Lyon said. Most are still waiting for the DOL, which has been evaluating public comments since issuing a request for information in 2010.

Among DC plans without in-plan retirement income solutions, the biggest reasons for inaction were waiting for “products to mature and gain broader adoption” (60%) and waiting for clearer fiduciary protection from the DOL (39%), the survey said. Other popular reasons were high fees (35%) and the lack of portability across record-keeping platforms (18%). Respondents were asked to provide their top two reasons.

The survey, conducted in September, elicited responses from 221 executives from plans with combined assets of $374 billion.

Mr. Lyon described as “really interesting” the responses by plan executives saying Labor Department fee-disclosure regulations, which took effect in July, provided little new information. Asked what percentage of information in the DOL regulations was new, the average response by executives was that 12% was new. The median response was zero.

“We know how much time and money was spent” complying with the regulations affecting disclosure to sponsors from providers, Mr. Lyon said. “For the institutional part of the market, what didn't get done because of all the energy expended on fee disclosure? For large plans, the benefit relative to the costs was low.”

Plan executives also characterized as modest the amount of new information for a separate set of DOL regulations governing fee disclosure plan sponsors give to participants. When asked what percentage of information was new, the median response was 10% and the average response was 25%. Those regulations took effect in August.

Although they criticized the paucity of new information in the DOL rules, plan executives praised their record keepers' help with preparing fee disclosures for participants. Some 82% said they were very satisfied or satisfied. “Sponsors seemed happy and grateful — more than I would expect for any happiness with record keepers,” Mr. Lyon said.

The survey also explored the changing role of stable value, finding that the average asset allocation among plans is 20%, with 69% of plans offering the option.

The survey also found that plans that don't offer stable value now probably won't in the near future. Some 38% of respondents said it was “very unlikely” they would add it within the next two years, 7% said it was “unlikely” and 33% said they didn't know.

Among those offering stable value, 4% said it was very likely or somewhat likely they would drop the investment option while another 4% said they weren"t sure.

Asked hypothetically where they would map investments if their plans exited stable value, 31% of executives cited a qualified default investment alternative such as a target-date fund. Other popular choices for mapping were a government money market fund (18%), short-term bond fund (15%) or prime money market fund (14%).

Although respondents weren't asked specifically why they had discontinued stable value or were thinking about dropping it, Mr. Lyon said higher fees and stricter contracts required by wrap providers play a major role.

“Wrap providers are in the driver's seat,” said Mr. Lyon, referring to the companies that provide insurance protecting for participants the book value of stable value products. “There's more demand than supply” for wrap insurance.

When the survey asked executives if wrap providers had changed fees or contract terms over the past four years, 72% said yes. Although the question was worded broadly, Mr. Lyon said he had never heard of a wrap provider changing a contract to offer looser terms or lower fees.

When plan executives were asked if risks associated with stable value had changed in the past four years, 56% who don't offer stable value options said the risks had increased. Among executives whose plans have stable value options, 46% mentioned higher risks.

The survey noted that 72% of executives whose plans offer stable value said the average participant doesn't understand this investment option. However, only 29% of plans offering stable value have “enhanced (their) communications” to participants regarding stable value over the past two to three years, the survey said.

Of those executives whose plans don't offer stable value, 97% said the average participant doesn't understand the concept.

This article originally appeared in the October 29, 2012 print issue as, "Plan exec survey finds strong interest in retirement income".