Fiduciary Reforms Impact Plan Leakage Trends, Income Decisions

Plan sponsors are being more conscious and cautious with respect to managing the implications of the DOL fiduciary rule—and this is impacting plan leakage and rollover decisions to a strong degree, Callan says.

Callan has published its 2018 DC Survey, offering up a highly detailed overview of the U.S. defined contribution (DC) plan industry.

The extensive analysis covers a broad range of topics, including the “leakage challenge” faced broadly by plan sponsors large and small.

According to Callan’s research, most plan sponsors (79.6%) have taken steps in the recent past to prevent plan leakage, but they have met only moderate success. Some of the more common strategies observed by Callan researchers included offering partial distributions and encouraging rollovers in from other qualified plans, which tied for the most common strategies cited by plan sponsors, both at 56%.

“More than half offer installment withdrawals (50.5%),” Callan reports. “Nearly two-thirds (62.4%) anticipate taking additional steps to prevent plan leakage in 2018—most notably, more actively seeking to retain terminated/retiree assets.”

As others have reported, Callan suggests the ongoing Department of Labor (DOL) fiduciary rule reform effort—even with all its tribulation and uncertainty—is helping to shape the increased reports of plan design and investment changes. For the most part, Callan says, plan sponsors are being very conscious and cautious with respect to decisions made to manage the implications of the rule.

The analysis highlights some additional common steps that plan sponsors say they will take in 2018 to combat plan leakage. These include making the fund lineup more attractive to terminated/retired participants and allowing terminated/retired participants to continue paying off loans. Tied to the leakage challenge, Callan reports two-thirds of plans now offer a retirement income solution to employees. Of those that offer in-plan guaranteed income products, 60% are government plans, suggesting corporate America is still somewhat hesitant to turn DC plans into pension-like vehicles for retirees. 

“No plan sponsors report offering qualified longevity annuity contracts (QLACs) or longevity insurance in their plans, despite a 2014 Treasury Department ruling making it easier to do so,” Callan reports.

The research shows plan sponsors cite a number of reasons for being unlikely to offer an annuity-type product in the near term. The top reasons include the belief that it is unnecessary or not a priority and being uncomfortable or unclear about the fiduciary implications.

“Plan sponsors also cite that they are concerned about additional factors,” Callan reports. “These include a lack of participant need or demand; availability of a defined benefit [DB] plan, and annuities being too costly. One plan sponsor noted that annuities had previously been removed from the plan due to low usage.”