March 08, 2024 

DC plans treading carefully before launching retirement income options

Sponsors' deliberate approach reflected in different strategies

Although many sponsors remain unwilling to stick their necks out to add an in-plan retirement income solution, some DC plan executives are dipping their toes into the pool of options that go beyond offering interactive calculators, fixed-income investments comprising retirement tiers and one-on-one counseling about saving enough — and spending enough — for retirement.


Strategies vary for plans offering the more complex options such as embedded annuities or non-annuity guaranteed withdrawal benefits, but the theme is the same: more ways to help participants guard against outliving their retirement savings and cope with stock market volatility.

Zack Berlat/Gonzaga University

Lisa Schwartzenburg

"It was important to take some time to understand how the industry is evolving, explore the way lifetime income solutions are being used in higher education retirement plans, examine recent regulatory support, and thoroughly review the benefits for participants," said Lisa Schwartzenburg, assistant vice president for human resources operations at Gonzaga University, Spokane, Wash.


Last month, the university's $492 million 403(b) plan began offering a fixed annuity tied to a custom target-date fund, an option offered by TIAA.


"We wanted something with a guaranteed income stream" to offset stock market volatility, added Joseph Smith, the university's chief financial officer. He is a member of the university's retirement committee; Schwartzenburg is the chair.

The university began reviewing guaranteed income information about a year ago. "We were aware of other options, but we felt that TIAA was pretty hard to beat," Smith said.


TIAA is the plan's record keeper. The plan has offered TIAA annuity products among its investment options, but not as a target-date fund.


"All prior target-date funds are gone," Smith said. "All participants who did not make a change during election period, whether in prior target date or self directed, mapped to new target-date series."


The TIAA RetirePlus Pro from TIAA gave university officials flexibility, such as adding their own underlying investments within the target-date series, Schwartzenburg said.

"The annuity offers participants the ability to annuitize a portion of their assets at retirement if desired, converting a portion of assets into a guaranteed stream of income for life."

"A fixed annuity offers several benefits to participants including a minimum guaranteed rate providing downside protection, which safeguards against market volatility during critical years of wealth accumulation," she explained.


The customized target-date series glidepath adjusts its mix of equities and fixed income to a more conservative mix as a participant grows older. It includes an allocation to TIAA Traditional, which offers "a minimum guaranteed interest rate coupled with the potential for additional interest depending on the market environment," she said.


Participants also may receive a "loyalty bonus," which gives participants a higher annuitization rate if they have "a longer contribution history," she said. "The annuity offers participants the ability to annuitize a portion of their assets at retirement if desired, converting a portion of assets into a guaranteed stream of income for life."


Smith pointed out that amounts in new target-date series are "fully liquid to the participant," adding that "annuitization is not required at any point."


Gonzaga officials began their education campaign in September, holding town hall meetings, producing webinars and making TIAA representatives available for one-on-one consulting. The custom target-date series is a qualified default investment alternative, and participants can opt out. "Our data suggests most participants are defaulting in," Smith said.


Unum to launch annuity option

Starting at the end of March, Unum Group will offer DC plan participants Fidelity Investments' Guaranteed Income Direct, which allows participants to convert a portion of their DC plan savings into an annuity.


"We looked at a bunch of solutions," said Ben Roberge, director of financial and retirement programs, whose 401(k) plan has $2.3 billion in assets and 9,400 active participants. "It's been a multiyear journey."


Starting in late 2021, Unum began asking employees what they wanted. "We knew from our employee population and feedback that there was a desire to offer an immediate annuity," Roberge said. "We also know that some of our participants desire a deferred annuity to offer longevity protection, and we will be offering another solution in the near future tied to our target-date funds that does just that so that our employees/retirees will have flexibility to chose what best meets their needs."


Fidelity Guaranteed Income Direct, which provides a platform for converting 401(k) or 403(b) plan savings into an annuity, isn't embedded within a target-date series and isn't part of a qualified default investment alternative.


Unum kept it separate from the target-date series. "There isn't an option to link Guaranteed Income Direct with target-date funds," Roberge explained. "It is a separate type of solution that allows eligible participants to take a distribution from their account to purchase an annuity."


Fidelity doesn't choose an insurer and it isn't a fiduciary for Guaranteed Income Direct. Four insurers have signed up, and more can be added.


The insurer is the sponsor's responsibility, and Roberge said the opportunity to choose multiple insurers was a strong selling point to create competition for price and service among them.


Participants can convert up to $1 million with a minimum of $10,000. Unconverted savings will go back to the participant's retirement savings account.


"Plan sponsors will not have a charge associated with adding this service," a Fidelity spokeswoman wrote in an email. "Fees may be associated to amend plan documents by plan administrator. Fidelity will receive compensation from the insurance company to provide this service and support."


Years of planning

Since December 2022, Lincoln Financial Group has offered an in-plan guaranteed income option that is the result of more than three years of research and planning.


"It is best suited for someone who wants a guaranteed income and help minimizing stock market volatility," Melissa Santostefano, assistant vice president for total rewards-retirement, said in an email.


The guaranteed income product is structured like a target-date series, but it is offered outside of Lincoln's target-date series for its two 401(k) plans and two money-purchase plans, a decision, she said, to give Lincoln's participants greater flexibility in their retirement savings strategies.


The target-date series is a qualified default investment alternative; but the guaranteed income product, called Income America 5ForLife, is not.


Participants can take a distribution any time after reaching age 65 even if they are still working. The annual distribution is 5%, which can be taken on a monthly, quarterly, semiannual or annual basis. If a participant outlives his or her guaranteed income account balance, payments will continue because the product contains an insured annuity.


Income America 5ForLife is offered by Income America, a consortium of six companies including Lincoln. Santostefano said the Lincoln retirement plan executives looked at other guaranteed income options.


"As a plan sponsor, Lincoln continually monitors the Income America 5ForLife investment option as it does all other options under the plan," she wrote. "This includes monitoring educational opportunities to help our participants understand the different investment options in the plan and the mechanics of IncomeAmerica."


As of year-end 2022, the guaranteed income product was used by 110 participants with aggregate assets of $7.3 million. Total participation in the four Lincoln retirement plans is 19,000 people with total assets of $3.5 billion.


Santostefano won an Excellence & Innovation Award in 2023 from Pensions & Investments and the Defined Contribution Institutional Investment Association.


Shifting into lifetime income

Illinois State Universities Retirement System uses a custom target-date series that automatically adjusts as participants reach age 50, shifting a portion of retirement assets into a lifetime income option.


This SURS Lifetime Income Strategy, or SURS LIS, is quite popular, Suzanne Mayer, executive director of Illinois SURS, wrote in an email. (SURS LIS was developed by AllianceBernstein.)


The guaranteed income withdrawal benefit isn't an annuity. "With a traditional annuity, an insurer takes control of your savings in return for a specified annual lifetime income stream," the university explains in a brochure to participants. "Under the SURS LIS, your Guaranteed Income Withdrawal Amount specifies how much you can withdraw from your balance in the Secure Income Portfolio each year ... with the promise that each participating insurance company will pay its portion of the annual withdrawal amount if your account is depleted."


Participants "always maintain complete control over the non-secured portion of your SURS LIS account, without surrender charges," the brochure says.


Ninety percent of participants in the SURS 401(a) plan are in SURS LIS, accounting for 71% of the plan's $4.1 billion in assets, she wrote of the option, which became available in September 2020. SURS LIS is the qualified default investment alternative.


In March 2021, the SURS LIS was added to the $48.5 million deferred compensation plan. Eighty-eight percent of participants, accounting for 59% of plan assets, remain in this option, she added.


Since July 1, "all newly hired SURS members are auto-enrolled in SURS Deferred Compensation Plan, (but) they can opt out during a 30-day window," she wrote. "Members that are automatically enrolled contribute 3% of their income before taxes in the SURS Lifetime Income Strategy. Members can make their own enrollment decisions and change their investment allocation."


SURS executives spent six months reviewing proposals from record keepers and from providers of retirement income solutions — six of the former and 20 of the latter. SURS chose Voya Financial as its record keeper effective in September 2020, replacing Fidelity Investments and TIAA. Voya is the record keeper for SURS LIS.


Executives looked for something that would replace a fixed annuity as the lifetime income option because approximately 60% of DC plan retirees took a lump sum instead of the annuity. The fixed annuity option remains available.


Mayer won an Excellence & Innovation Award in 2021.

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TIAA Traditional is a fixed annuity product issued through these contracts by Teachers Insurance and Annuity Association of America (TIAA), 730 Third Avenue, New York, NY, 10017: Form series including but not limited to: 1000.24; G-1000.4; IGRS-01-84-ACC; IGRSP-01-84-ACC; 6008.8. Not all contracts are available in all states or currently issued.


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TIAA may declare additional amounts of interest and income benefits above contractually guaranteed levels. Additional amounts are not guaranteed beyond the period for which they are declared.

Lifetime income payments from TIAA Traditional may include a TIAA Loyalty BonusSM which is discretionary and determined annually.

Converting some or all of your savings to income benefits (referred to as "annuitization") is a permanent decision. Once income benefit payments have begun, you are unable to change to another option.

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