Defined contribution plan executives are beginning to explore “auto decumulation,” in which a portion of a participant's retirement savings is automatically placed into an annuity or other investment vehicle that provides a steady post-retirement income stream.
What's keeping them from pulling the trigger is a combination of scarce product availability, uncertain implementation costs and lingering worries over the health of the providers.
“We've told clients this type of program is definitely something we believe in,” said Howard Yata, managing director at Wilshire Associates, Santa Monica, Calif. “Conceptually this is right thing for DC plans to offer. But it is a developing area and the products we saw still have a ways to go before (we'll be) recommending them.”
Auto decumulation would provide defined contribution plan participants with one of the most attractive features of defined benefit plans; a guaranteed monthly benefit payment. Experts say this could help offset potential declines in 401(k) plan account values, such as those experienced last year due to excessive equity market exposure.
The concept of annuities as an investment option has been around for several years. But few plan sponsors offer the option because, among other reasons, the cost is high and many record keepers don't have a way to offer annuities on their platforms.
What's new is the availability of the “auto” feature. That's possible when annuities are a component of a target-date or risk-based asset allocation fund that then becomes the DC plan's qualified default option. Thus, in plans with automatic enrollment, participants are defaulted among the service providers using annuities in their target-date and/or risk-based asset allocation funds.
“This type of feature is already being talked about in the DC world,” said Courtney Turney, benefits analyst at St. Louis-based Arch Coal Inc., which has $250 million in its 401(k) plan. “Based on the fact people are living longer, it merits discussion, and we have talked about this type of feature on a preliminary basis. A lot of things are coming, but not a lot of products are out there to choose from just yet.”
Ms. Turney said auto decumulation helps combat the fact that people simply do not save enough money for retirement.