SECURE Act doesn’t erase all retirement income worries

For defined contribution plan executives, retirement income products are plagued by a cloud of uncertainty about cost, structure, liquidity and complexity, says the latest annual survey of DC consultants by PIMCO.

The concerns come at a time when retirement income is the fastest-growing priority among sponsors and the fastest-growing service offered by consultants, said the annual survey, published June 15. Newport Beach, Calif.-based Pacific Investment Management Co. LLC surveyed 27 DC consulting and advisory firms serving 3,500 clients with approximately $4.3 trillion in plan assets.

Sixty-seven percent of respondents cited costs when asked what may stop clients from offering in-plan insurance products such as annuities. In last year's survey, costs ranked second at 38%.

The results are instructive because sponsors have long argued that plans' use of annuities and other insurance-based products have been thwarted by what they said was inadequate liability protection if their chosen insurer couldn't deliver on its promises or went bankrupt.

They got that protection with the December enactment of the Setting Every Community Up for Retirement Enhancement Act of 2019, known as the SECURE Act.

The law protects sponsors if they obtain "written representations" from an insurer affirming its financial health and meeting reserve requirements in states where it conducts business. Sponsors also can use many criteria in choosing an insurance provider, and they aren't required to hire the lowest-cost provider.

However, the law's passage seems to have exposed — or even accelerated — a host of other worries.

"The SECURE Act doesn't address all the issues," said Richard Fulford, PIMCO's executive vice president and head of U.S. defined contribution. "The SECURE Act took away the most obvious hurdle. There are a lot of items that need to be addressed."

The lack of protection — "insufficient government support" — was the sponsors' top concern (by 41% of respondents) for offering in-plan annuities in last year's PIMCO survey. In the latest survey, "fiduciary concerns," a reworded question referencing the SECURE Act, received 26% of respondents' votes, placing eighth of nine choices. (Many of the survey questions allowed multiple responses.)

Although the expected cost of annuities and other in-plan insurance products surged to the top of sponsors' lists of concerns, several other issues relating to these products rose in importance vs. last year's survey:

• The lack of liquidity and control jumped to 41% — ranking second — from 31% as a reason consultants believed clients might avoid these products.
• In third place this year, lack of participant demand rose to 37% from 31% last year.
• Perception of added liability, which ranked fourth, was cited by 33% of respondents, down from 34% last year.
• Operational complexity jumped to 30% — in fifth place this year — from 13% last year.

"Annuities have been available for years and years, but there hasn't been a high adoption rate," Mr. Fulford said.

When consultants were asked what sponsors should do to encourage participants to keep assets in their plans, offering annuities or other in-plan insurance ranked dead last among 11 choices with zero responses, down from 13% in the previous survey. "This reflects retirees' behavior," Mr. Fulford said.

Even with the SECURE Act, consultants doubted that their clients offering annuities or other insurance-based options would use an opt-out strategy. This referred to the practice of making these options a default but letting participants drop them.

Only 7% said clients would "likely" choose an opt-out approach, while 56% said it was unlikely or very unlikely they would do so. Another 37% said clients would be neutral. "Opt-out is sort of dead in the water," Mr. Fulford said.

The consultants said sponsors seemed more friendly to the opt-in approach — letting participants select an insurance-based product as part of the investment menu. Four percent said their clients would be "very likely" to use this approach and 30% said clients would be likely to do so. Eighteen percent said clients were unlikely or very unlikely, while 48% were neutral.

Despite outlining their clients' concerns, the consultants reported that 41% of clients said evaluating retirement income was one of their top three priorities, tied for second with reviewing target-date funds and just behind evaluating investment fees (44%). Respondents were given 12 choices.

In last year's survey, evaluating retirement income received only 16% of the consultants' votes in assessing clients' top priorities, finishing in a tie for eighth. The difference between the "evaluating retirement income" scores for the 2019 and 2020 surveys represented the largest increase among priorities for their clients.

Consultants have taken notice of clients' changing interests.

In the latest survey covering services offered to clients, 22% cited "retirement income/annuity product evaluations" vs. only 6% in last year's survey. This represented the largest increase among 17 choices. "This is a gigantic jump," Mr. Fulford said. "We see demand rising."

These evaluations were tied for fifth place among services most offered by consultants along with record-keeping searches and managed accounts evaluations, the survey said.

The leading services offered by consultants were total plan cost/fee studies (provided by 70% of consultants); discretionary oversight of investment selection and monitoring (37%), manager selection and monitoring (33%) and investment menu design (30%).

Keeping retirees' assets in the plan has captured greater interest among sponsors, the survey said. Twenty-five percent of consultants said their clients are actively trying to retain these assets vs. 14% in 2015.

Another 41% said clients prefer to retain these assets but don't actively encourage participants to do so — up from 32% in 2015. Nine percent preferred that retirees remove their assets from their plans vs. 17% in 2015. The rest were indifferent.

"We've been hearing this anecdotally with clients," said Mr. Fulford, referring to sponsors' active encouragement. Their appeal to participants includes cheaper share classes and lower overall expenses vs. IRA rollovers, he said.

The sponsors' motivation mixes practical considerations — more plan assets produce more bargaining power with providers — and employer paternalism. "There's a lot of interest in corporate America to take care of their people," Mr. Fulford said.

Consultants said the best ways for sponsors to retain retiree assets in their plans was allowing distribution flexibility such as partial or installment payments (70%), adding retirement education and tools (59%), offering "retiree-focused" investment options (52%) and communicating the value of staying in the plan (48%).

Among other DC product and plan design issues, the PIMCO survey:

• Reported that 74% of consultants said fees were the most important issue for clients contemplating a target-date RFP within the next two years, followed by performance (63%), and glidepath allocation of equities and fixed income (59%).
• Noted that a majority of consultants (52%) believed that plans with $1 billion or more in assets are candidates for offering custom target-date funds; 15% were comfortable with plans in the $500 million-$1 billion asset range; and 7% said plans in the $200 million-$500 million range were appropriate candidates.
• Said the biggest benefits for sponsors offering white label funds were simplifying the core menu (85%), making it easier to change investment managers (74%) and increasing investment diversification (74%). The biggest barriers were administrative complexity (82%), greater communication challenges (56%) and less transparency than single mutual fund options (48%).

The 14th annual PIMCO DC Consulting Survey was conducted between Feb. 11 and March 27. Respondents had $5 billion or more in assets under advisement and a median client size of more than $50 million in assets.