401(k) Plans Have Concerns About Guaranteed Income Products

Concerns expressed in a survey included fiduciary exposure, high costs and operational hurdles such as recordkeeping issues, among other things.

Only 5% of 401(k) plans offer a retirement income guarantee product in the plan, according to the Plan Sponsor Council of America’s (PSCA)’s 59th Survey of Profit Sharing and 401(k) Plans

Large plans were more likely to offer an income guarantee product (5.7%) versus small plans (4.4%). The types of retirement income guarantee products offered included guaranteed minimum withdrawal benefits (GMWB)/guaranteed lifetime withdrawal benefits (GLWB) (40%), traditional fixed annuities (33%), variable annuities (33%), managed account services (26.6%), managed payout funds (13.3%) and deferred/longevity annuities (13.3%).

However, 12.1% of respondents indicated their organizations are considering adding a retirement income guarantee product, PSCA reports, with large plans (18%) expressing more interest than small plans (7%).

“While guaranteed income products such as lifetime annuities have been in the headlines, plan sponsors are proceeding with caution,” says Steve McCaffrey, senior counsel II at National Grid and PSCA’s board chairman. “Plan sponsors continue to have questions about the role these products play as part of a plan, and the challenges and potential unintended consequences associated with them.”

The top concern plan sponsors expressed about adding a retirement income guaranteed product to the plan was fiduciary exposure (38.3%).  Other concerns included high costs (33.3%), operational hurdles such as recordkeeping issues (32.9%), non-portability (28.9%), risk exposure from the insurer guaranteeing the product (26.5%), lack of interest from participants (17.3%), and “not the role of the employer” to provide lifetime income products (13.3%). 

Not all plan sponsors had concerns; 34.5% expressed that they just had not added an income guaranteed product yet.

The 2016 PLANSPONSOR Defined Contribution Survey also found low usage of lifetime income products in defined contribution (DC) plans overall, but greater usage among 403(b) plans

PSCA’s 59th Annual Survey reflects the 2015 plan-year experience of 614 DC plan sponsors. The survey is available at https://www.psca.org/research.