Making Retirement Income A DC Plan Imperative
The 2014 Met Life Qualified Retirement Plan Barometer study touches on a retirement income issue lurking in the wings of employer-sponsored retirement plans. Specifically, should plans help people transition their plan savings into retirement income?
On the defined benefit (DB) side of the industry, that’s a given. The plan benefits are automatically paid out as monthly income, unless retirees elect another option that the employer may make available.
But on the defined contribution (DC) side, retirement income is not a given.
In recent years, most DC plans have focused on encouraging more employees to participate in the plans, and nudging them to save and invest at higher levels than previously. Hence the flowering of programs like auto enrollment and auto rebalancing, retirement readiness and financial wellness education, and — for the income-motivated folks — increased availability of target date funds and managed account options.
Some 401(k)s and other DC plans do offer advice programs, often online varieties. But these lean toward investment advice, not retirement income advice. A limited few plans do offer in-plan income options and/or access to advisors who can, for a fee, provide personalized retirement income advice, but these are the exception rather than the rule.
In fact, according to data from the LIMRA Secure Retirement Institute (SRI), more than two-thirds of employers (70 percent) provide no recommendation for a particular distribution option when participants retire. That’s based on a LIIMRA SRI 2014 survey of more than 1,200 employers that include more than one distribution option when DC plan participants retire.
According to the same study, the top three reasons employers give for not recommending a particular distribution option include: retiree needs are too varied (46 percent), fiduciary concerns (38 percent) and the financial professionals affiliated with the provider/recordkeeper offer this service (37 percent).
Other sources tell me that administrative issues and cost pressures are impediments too, as are employer convictions that plan responsibilities don’t include income advice. Still other employers just don’t know what to do, and some worry that, if the government gets involved, that could lead to yet another layer of government standards and regulation.
The MetLife study seeks to help move the discussion forward by raising some salient questions for plan sponsors to consider, such as:
- Would broadening and realigning traditional metrics to include income-oriented measures be helpful or appropriate?
- What do your plans do to provide for retirement income?
- Are annuities or other lifetime income options offered to participants in the DC plan? If so, what percentage of participants is selecting that option? Is this option guaranteed?
- What is the participant experience for navigating distribution decisions?
- If your DB (defined benefit) plan includes a lump sum optional form of payment, have you considered also adding a partial lump sum/partial annuitization alternative?
That’s not all. In this study, MetLife has planted its feet squarely on the track of retirement income advocacy for DC plans.
MetLife Executive Vice President Robin F. Lenna rings that bell in her opening comments. “We firmly believe,” she writes, “that in order for plan participants to recognize the importance of making their savings last a lifetime, retirement income must become a DC plan imperative.”
This is striking expressly because so many employers have not addressed the issue or because they view it as too hot to handle.
But national trends do support treating retirement income as an imperative. For example, for more than 30 percent of younger workers (ages 20 to 49), DC plans have become the “most important source of expected retirement income,” according to research from LIMRA SRI. No other category ranks as high — not Social Security, not individual retirement accounts, not personal savings and investments, not traditional pensions or DB plans, and not job earnings.
Younger plan participants can always look outside for retirement income advice, as many older participants do today. But many workers never get there, according to industry research, a situation giving rise to haphazard planning and uncertain retirement security.
In today’s market, DC plans are not required to offer retirement income services. But does that mean doing nothing is OK?