Are We Ready for Retirement Income?

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective.

That’s right—for the vast majority of participants today, creating that “paycheck for the rest of your life” remains a DIY undertaking. To this day only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. 

However, the need for that solution is widely acknowledged—and there are some new, if somewhat familiar, solutions emerging. 

Earlier this month, BlackRock garnered some headlines with news that not only was it building annuity contracts into a target-date fund series, but also that it had already lined up five large plan sponsors (with some $7.5 billion in assets) to implement the option as a default.

That followed by a few months the March announcement of a consortium of providers (American Century Investments, Lincoln Financial Group, Nationwide, Prime Capital Investment Advisors, SS&C Technologies, Wilmington Trust, N.A. and Wilshire) that had collaborated on a new in-plan target-date fund series with guaranteed income for life baked in. One that is also purportedly “portable among major recordkeepers where Income America 5ForLife is available”).

SECURE ‘Acts’

Those announcements, of course, came in the wake of the SECURE Act, which included three specific provisions designed to overcome the reluctance of plan fiduciaries (and participants?) to embrace these options:

• Portability—generally, it permits special distributions of a “lifetime income investment” when the investment is no longer authorized to be held under the plan, which makes it possible for a participant to keep the investment even if the plan sponsor changes recordkeepers or decides to eliminate the investment from the plan lineup. 
• Disclosures—requires plans to give participants projections of their current account balance as a monthly benefit using assumptions prescribed by the Secretary of Labor, a provision designed to help participants better understand what their projected retirement savings will produce in terms of monthly income in retirement. Or, said another way, to help get them oriented to thinking about turning that retirement savings balance into that proverbial paycheck for life.
• Fiduciary Safe Harbor—which, in essence, provides that a DC plan fiduciary that selects a “guaranteed lifetime income contract” to be offered under its plan, he/she will be deemed to have acted prudently if it follows a series of steps outlined in the law. That means that the fiduciary will not be liable if the insurance company later defaults on its obligation to participants who invest in the contract.

It remains to be seen if all this will actually move the needle—but they do seem to directly confront—and, at least potentially—resolve the issues that have long been put forth as objections to the embrace of lifetime income options on a retirement plan menu. Indeed, both offerings also deal with the more traditional objection to annuity products—their cost—if they actually work.

There’s no question that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help (certainly with some help from a trusted advisor). Wrapping a complicated product (and lifetime income is complicated) in a relatively simple product is certainly one way to ease acceptance. Moreover, doing so with a product in which contributions are defaulted should certainly improve the rate of adoption by participants—if plan sponsors are inclined to make it available on that basis. 

And if advisors are willing to help. 

- Nevin E. Adams, JD