More than ever before, employer-sponsored retirement plans are offering guaranteed income solutions to help meet this need. It’s important for advisers and consultants to understand the proliferation of guaranteed income solutions and how they can help savers achieve a better retirement outcome.
Securities-based solutions, such as managed payout strategies and retirement income mutual funds, can help participants achieve retirement income and provide access to upside potential in the market (as well as its downside risk), but without a guarantee that the money will last for a participant’s lifetime. These strategies are designed to provide a steady stream of retirement income and allow retirees access to their money during their lifetime while leaving an opportunity for a legacy for their heirs in the event of death. Managed payout solutions emphasize the decumulation phase—they make periodic distributions that can go up or down based on market performance at a specified rate and can have different objectives and risks associated with them.
Traditional Insurance Annuity Solutions
Some traditional insurance annuity solutions provide a guarantee of lifetime income that avoids market losses, but restricts the opportunity to capture market gains since the rate of return is guaranteed and fixed. These annuity solutions are used both in and outside of retirement plans. The principal advantage of traditional fixed annuity contracts is that they guarantee income payments for the life of the participant and/or his or her spouse. Unless a “period certain” annuity is utilized, a participant generally relinquishes access to the market or account value thereby limiting the ability for fixed annuities to be passed on to heirs or estates.
Guaranteed withdrawal benefits (GWB) are often combined, or “hybrid” solutions, that consist of a mutual fund, such as a balanced or target-date fund (or similar diversified investment vehicle), and a guaranteed withdrawal benefit feature, which is issued by an insurance company. The contractual provisions include income for life, access to assets during the accumulation period as well as the payment or income period, and protection of guaranteed income in down markets, enabling savers to participate in rising markets. Participants are able to maintain a higher equity exposure in their portfolio due to the protection and guarantees provided, promoting better asset allocations for participants nearing retirement. Participants retain ownership of and access to their accounts and can leave any remaining balance to their heirs. These offerings can be more expensive than other non-insured solutions.While all of the solutions provide distinct advantages and disadvantages to savers, an understanding of the value of in-plan guarantees can help advisers and consultants stand apart in today’s retirement landscape.
Here are some things to consider when recommending an in-plan guarantee to employers:
What are the key benefits of in-plan guarantee solutions for plan sponsors?
- Plan sponsors may be able to offer in-plan solutions at a lower cost to participants because the solutions are institutionally priced.
- These solutions can provide a competitive retirement benefit for employers to help recruit and retain top talent.
- Plan sponsors can help transition employees into retirement by offering an in-plan guarantee solution. Participants closer to retirement may feel the need to work longer if they are uncertain that their retirement income will meet their expenses. This can lead to fewer opportunities for advancement for employees who are earlier in their career. An in-plan guarantee may help participants closer to retirement leave the workforce when they are ready and create career opportunities for high potential employees to fill these positions.
- In-plan guarantees can be simple to integrate with existing target date or asset allocation solutions.
- Employers that had a defined benefit plan in the past can incorporate some of the same benefits like income distribution into their defined contribution program.
- The solutions may be appealing for sponsors concerned with the benefit adequacy and unsustainability of withdrawal rates for plan participants by offering guaranteed payments for the lives of their participants and the participant’s spouse.
What are some fiduciary considerations for in-plan guarantees?
A plan sponsor has fiduciary responsibility for the selection, review and monitoring of any investments within their retirement plan, including in-plan guaranteed products. Some recordkeepers, providers and intermediaries provide tools that support plan fiduciaries that can help a sponsor readily apply the fiduciary process to in-plan guarantees. These tools make the fiduciary evaluation much easier for plan sponsors. Some of the resources also include tips about how to evaluate the financial strength and claims-paying ability of an insurance company.
What’s the future for in-plan guarantee solutions?
The Department of Labor (DOL) is working on a proposed regulation that would require monthly income projections to be included on participant quarterly benefit statements. Many providers already offer this service. DOL indicated it will release a proposal to amend its “safe harbor” rules for fiduciaries that make annuities available as distribution options from a defined contribution plan. Fiduciaries often tend to seek to satisfy a safe harbor when one is available. If the new regulation is easier to comply with, it could act as a regulatory catalyst to promote further adoption of guaranteed income solutions.
In-plan guaranteed income investments may not be suitable for every plan. Advisers should evaluate a plan sponsor’s retirement plan goals to determine the solution that makes the most sense for its participant base. By understanding the need for and move towards guaranteed income solutions, intermediaries have the opportunity to introduce their clients to a savings vehicle that can help ensure savers get to and through retirement with confidence.
Lincoln Financial Group is the marketing name for Lincoln National Corporate and its affiliates.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.