Advisers, Providers and Sponsors View In-Plan Income Differently

According to Cerulli research, the various parties involved in the implementation of an in-plan retirement income solution are often not on the same page about basic terminology and definitions.

According to the fourth quarter 2018 issue of The Cerulli Edge—U.S. Retirement Edition, there is a disparity in the way different retirement industry stakeholders think about the prospect of offering participants greater access to in-plan retirement income products.

Notably, Cerulli finds 401(k) plan sponsor survey data shows that plan sponsors are not necessarily thinking strictly about annuities when contemplating the addition of an in-plan retirement income options. Despite this, recordkeepers most commonly point to an annuity-based product as being top-of-mind for plan sponsor clients.

According to the report, while defined contribution plan sponsor implementation of in-plan retirement income solutions remains low, Cerulli observed “a reinvigoration of the subject in 2018.” With this renewed focus, defined contribution investment-only (DCIO) product managers are getting more involved in discussions about new in-plan income opportunities.

“This shift involves plan sponsors proactively inquiring as to how the DCIO’s in-plan retirement income solution is structured and implemented,” Cerulli says. “This inquiry contrasts with prior years in which DCIOs described discussions with plan sponsors on lifetime income solutions that were either politely listened to without any follow-up or rebuffed outright.”

Based on a previous Cerulli survey of 41 DCIO asset managers representing greater than $3.8 trillion in DCIO assets, close to half (41%) currently offer an in-plan retirement income product and another 10% are considering adding one. For the 41% of DCIOs that currently offer an in-plan retirement income product, Cerulli says, target-date funds are the most common structure.

Cerulli contends that inclusion of a guaranteed component is “not a prerequisite for an effective retirement income product.” But at the same time, a basic asset-allocation shift to more conservative investments “may not be enough to address the diverse financial situations of investors near or at retirement age.”

According to Cerulli data generated in 2017, close to 13% of plan sponsors surveyed responded that they expected to add or were considering adding a retirement income solution to the plan menu in 2018. Cerulli then asked this cohort of plan sponsors to identify what type of product they were considering as an in-plan retirement income solution.

“This data demonstrates that the financial services community, including asset managers, recordkeepers, consultants, and plan sponsors, talk past each other regarding retirement income solutions,” Cerulli says. “For example, close to one-fourth (24.5%) of 401(k) plan sponsors considering adding a retirement income solution identify a broad-based fixed-income strategy in a mutual fund vehicle as the strategy they would be most likely to offer participants. In contrast, an asset manager is highly unlikely to consider this an appropriate retirement income solution—the same can be said for the nearly 13% of plan sponsors that select a dividend-paying mutual fund as a retirement income solution.”

According to Cerulli, the data begs the question, “What exactly do you mean by retirement income strategy?” Cerulli believes that, for the DC industry to make meaningful progress in positioning DC plans as a retirement income platform, “all players need to speak the same language.”

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