Plans' Approach to Income
The Pension Protection Act of 2006 (PPA) resulted in massive reform of the retirement planning industry, permitting a safe harbor for plan sponsors to automatically enroll participants into the company defined contribution (DC) plan. The time is ripe for the next big development—plans embracing retirement income, predicts July’s “The Cerulli Edge – U.S. Asset and Wealth Management Edition.”
“We are seeing a DC industry in which plan sponsors and consultants are taking a degree of control away from the participant, with the intention of guiding plan participants to better decisions about retirement savings,” says Bing Waldert, a managing director at Cerulli. “As part of this continued innovation, converting the 401(k) plan to an income platform is a step in taking DB [defined benefit] market experience and applying it to the 401(k) market.”
Cerulli says the first step the industry should take to make this happen is to encourage plans to keep retired participants in the plan. The second is to work with recordkeepers to allow participants to take systematic withdrawals, and the third is to offer target-date funds (TDFs) that include retirement income options.
Offering annuities in 401(k) plans is another obvious option, Cerulli says, but before this is likely to happen, the Department of Labor (DOL) will need to offer plan sponsors a safe harbor for the selection of an annuity provider.
A look at the 2017 PLANSPONSOR Defined Contribution Survey finds that the most common way plans now approach the retirement income question is to allow for systematic withdrawals, with this offered in 35.5% of plans. As the size of plans increases, this practice becomes more common. For instance, it is offered in only 18.9% of micro plans, but 49.2% of midsize plans, 51.0% of large plans and 64.5% of mega plans.
The second most common approach is to offer in-plan managed account services that turn balances into monthly income, this being done in 15.0% of plans overall. Only 9.9% of micro plans offer such a service, but, like systematic withdrawals, it becomes increasingly common as plan size grows—found in 18.2% of midsize plans, 21.2% of large plans and 32.1% of mega plans.
The third most common option—though less than half so as the previous two—is offering in-plan products that guarantee monthly income at retirement, with 7.1% of plans doing this. Just 5.0% of micro plans choose the option, as do 8.2% of midsize plans, 8.3% of large plans and 8.5% of mega plans.
Fourth most common is to use an out-of-plan annuity purchase/bidding service; 4.8% of plans do this, specifically 2.1% of micro plans, 4.6% of midsize plans, 7.7% of large plans and 13.2% of mega plans.
While 37.4% of plans offer no income-oriented products or services, if Cerulli’s projections are correct, this could change dramatically in the years to come.
Retirement Income-Oriented Products/Services Offered in 401(k) Plans
| 2017 | Overall | Micro | Small | Midsize | Large | Mega |
| Systematic withdrawal option at retirement |
35.5% | 18.9% | 36.8% | 49.2% | 51.0% | 64.5% |
| In-plan professional managed account service that turns balances into monthly retirement income |
15.0% | 9.9% | 13.8% | 18.2% | 21.2% | 32.1% |
| In-plan products that guarantee monthly income at retirement |
7.1% | 5.0% | 8.1% | 8.2% | 8.3% | 8.5% |
| Out-of-plan annuity purchase/bidding service |
4.8% | 2.1% | 5.1% | 4.6% | 7.7% | 13.2% |
| In-plan managed payout fund(s) specifically designed to generate a cash flow stream |
4.7% | 3.8% | 4.7% | 5.1% | 5.8% | 6.8% |
| Unsure what type of income product(s) are offered |
20.9% | 29.6% | 21.8% | 14.6% | 6.4% | 5.6% |
| None—we offer no income-oriented products/ services |
37.4% | 45.4% | 36.4% | 31.8% | 34.3% | 17.9% |