Lifetime income provisions held back by concerns over expense, legal liability
When defined contribution sponsors contemplate lifetime income solutions, their actions — or more likely, inactions — resemble the ERISA version of the film "Groundhog Day."
Year after year, most sponsors lament the lack of a federal legislative and/or regulatory safe harbor to protect them against fiduciary risk in offering in-plan solutions such as annuities. They fret that such in-plan retirement income products are too expensive, too complicated and too lacking in portability.
And year after year, many sponsors say such in-plan solutions aren't a top priority and that participants aren't clamoring for them.
Interviews with DC plan consultants and researchers as well as examination of recent surveys indicates that there will be a replay of "Groundhog Day" this year unless Congress and/or the Department of Labor enable in-plan solutions to be more amenable to sponsors and more attractive to participants.
"We're still in a walk-before-we-run environment," said Ross Bremen, a partner in the Boston-based investment consulting firm NEPC LLC. Sponsors remain more comfortable offering target-date funds and managed accounts or expanding fixed-income menus than offering in-plan annuities or guaranteed minimum withdrawal benefit options, he said.
"There is still a keen interest, but the practicalities get in the way," said Greg Ungerman, senior vice president and defined contribution practice leader for the consulting firm Callan LLC, San Francisco.
Callan's annual surveys of DC sponsors shows little change in activity. Last year, 4.1% of sponsors offered in-plan guaranteed income products vs. 8.9% in 2017 and 3.8% in 2016.
Only 9.5% offered annuity placement services last year vs. 8% in 2017 and 3.8% in 2016. Such services enable participants to select and choose annuities for retirement while relieving the sponsors of the fiduciary liability of offering an in-plan annuity.
Other products have gained little traction.
Only 1.4% of plans offered longevity insurance or qualifying longevity annuity contracts, for which the Treasury Department relaxed rules five years ago. No plans offered these options in 2017; only 1.9% offered them in 2016.
The number and types of respondents for the Callan surveys vary annually, Jamie McAllister, senior vice president and defined contribution consultant in Callan's fund sponsor consulting group in Chicago, wrote in an email. Each year, the majority of respondents are executives from 401(k) plans. In the latest survey, government plans were excluded.
When sponsors were asked why they don't offer an annuity-type option, the biggest reason was that they were "uncomfortable" or "unclear" about fiduciary obligations, said the latest survey, conducted in October 2018 with 106 client and non-client DC plans. Among 12 choices, the second-largest reason cited by respondents was that these products were "unnecessary or not a priority." The third reason: "No participant need or demand."
Mr. Ungerman speculated that an evolving workplace — people change jobs more often and have shorter tenures — could have influenced the responses for the latter two reasons. "That's a big challenge for these types of products," he said.
Retirement income doesn't rank very high when Callan asked sponsors how they measure plans' success. Given 10 choices in annual surveys, retirement income adequacy placed as low as eighth and as high as fifth in each of the last four years.
The latest survey also found that retirement income doesn't rank high in plan communications. Among seven choices, retirement income adequacy placed fourth and managing income in retirement was last when sponsors were asked about communications initiatives for 2019.
Callan's recommendations for lifetime income solutions are tied to clients' specific circumstances. "It depends upon a number of factors," Ms. McAllister wrote.
All talk, no action
"Everybody still loves to talk about it," said Robyn Credico, the Arlington, Va.-based defined contribution consulting leader for Willis Towers Watson PLC. "Almost nobody is doing anything."
Her firm's survey, published in February 2018, said 3% of sponsors offered in-plan options in 2017 and 4% were considering it for 2019. However, 93% weren't planning on it or considering it.
Also, 3% provided out-of-plan options in 2017 and 1% was considering it for 2019. Ninety-six percent had no interest, said the survey of 349 executives in 401(k) plans, both clients and non-clients. Respondents represented plans with aggregate assets of $770 billion and 4.6 million participants.
Among her clients, a stricter safe harbor is the top request. "If we got a safe harbor, I think there would be more interest," Ms. Credico said.
"When clients ask us about the feasibility of including annuities or other guaranteed income options in their 401(k) plans, we recommend that they educate themselves on the available options, fiduciary responsibilities, and the need for a lifetime income based on their company demographics so that they can determine a path forward," she said.
Although sponsors say a stronger safe harbor is crucial for their consideration, DC consultant Martin Schmidt said he was skeptical.
"It's a factor, but it's a convenient excuse," said Mr. Schmidt, principal at MAS Advisors, Chicago.
For many sponsors, "retirement income is not on their radar screen," he added. "There's not a groundswell of support. There's passive interest at best."
Mr. Schmidt said he has detected among providers of in-plan guaranteed and non-guaranteed lifetime income products a "dialing back" of marketing claims. For example, a few years ago, some providers were promoting to sponsors lifetime income products as a default option. He declined to discuss specific companies.
When he questions providers about their retirement income products, "you get a lot of non-specific answers" about participant utilization and assets under management, he added. "To me, that's a tell-tale sign. Utilization has been disappointing."
The experience of International Paper Co. illustrates the challenges of retirement income solutions. Last year, the company's two 401(k) plans began offering a service from Hueler Cos. that allows participants to review annuity options that they can choose when they retire. The service provides names of pre-screened providers with information on quotes, credit ratings and product features. Hueler acts as a platform for the annuity providers, and International Paper isn't considered a fiduciary because the annuities aren't offered within the 401(k) plans.
"We have had over 200 inquiries regarding annuity quotes, however there have not yet been any purchases," Diana K. Winalski, the Stamford, Conn.-based head of 401(k) product management, wrote in an email.
"We understand that purchasing an annuity is a complex, irrevocable decision and it may take time for our participants to understand that an annuity can play an important role in retirement income planning and managing longevity risk," added Ms. Winalski, who won a 2018 Excellence Award sponsored by Pensions & Investments and the Defined Contribution Institutional Investment Association.
Consultant Jennifer Flodin said she has seen "no movement" among clients to offer in-plan options. The need for a safe harbor as well as less expensive and less complicated products are the main reasons for their reluctance, said Ms. Flodin, DC practice co-lead for Pavilion Advisory Group Inc., Chicago..
Alight Solutions, Lincolnshire, Ill., has found that sponsors are willing to take more modest steps to help participants. In its latest annual survey, 76% said they offer online modeling tools or mobile apps; 57% allowed participants to choose automatic payment for distributions and 47% offered managed account with drawdown options in which the provider allocates participants' assets for income.
However, in-plan annuities or guaranteed minimum withdrawal benefits (11%), services helping participants buy annuities outside the plans (9%) and QLACs (1%) were the least popular offerings.
The survey, conducted in the fall of 2018, covered 171 plans with 7.6 million participants — both clients and non- clients — with 95% of the responses from 401(k) plans.
Alight's research also illustrates the "Groundhog Day'' nature of in-plan retirement income solutions. In each of the last three annual surveys, fiduciary concerns ranked first among sponsors' reasons for avoiding in-plan products. "Waiting to see the market evolve more" placed second or third, alternating with "operational/administrative concerns" as reasons for inaction. Concerns about participant utilization placed a constant fourth in these annual surveys.