PSNC 2013: Inside or Out?

Should retirement income products be offered inside defined contribution (DC) plans or as rollover solutions?

The DC marketplace is taking retirement income products seriously, said Greg Cimmino, managing director of Institutional Investment Consulting, during a panel discussion at the PLANSPONSOR National Conference. Participants are not comfortable with the decumulation phase and making draw-down decisions. They like automatic solutions, he noted. 

Cimmino added that participants tend to see their account balance as wealth and not as a source of income. “Two-hundred-fifty thousand looks good, but not as income over a lifetime,” he said. So, they need solutions.  

However, there is low utilization of the products by plan sponsors. Jeb Graham, retirement plan consultant/partner at CapTrust Advisors LLC, said this is because plan sponsors do not see a need; participants are not pushing for retirement income products. There are surveys that show participants want these solutions, but Graham contended there is a disconnect between the current products and how the survey questions are framed. “If you say ‘retirement income,’ people think of that as a positive, but if you say ‘annuity,’ that’s negative,” he noted.  

He added that plan sponsors also have fiduciary concerns that make them reluctant to adopt retirement income products.

Choosing a retirement income solution is a fiduciary process, Cimmino pointed out. He said plan sponsors should consider how many employees are approaching retirement, whether they already have a defined benefit (DB) plan and whether they want to keep assets in their DC plan for economies of scale. When considering a provider, plan sponsors should ask about the premium cost; whether assets are kept in a separate account or general fund; the costs of underlying assets; strength of the solution provider and its guarantees; and whether the product is portable for the plan in the case of a new recordkeeper, and for the participants if they leave employment. Cimmino added that retirement income products need ongoing monitoring just like other investments.  

Pros and Cons

John Pickett, senior vice president/financial adviser at CAPTRUST Financial Advisors, explained some pros and cons of out-of-plan versus in-plan solutions. Out-of-plan solutions include:

  • Non-guaranteed: managed payouts and systematic withdrawal programs; and
  • Guaranteed: annuity purchase program. 

For the non-guaranteed solutions, Pickett said, aside from the fact they are non-guaranteed, participants must make decisions at a high- pressure time and there is a risk of participants outliving their assets. For the guaranteed solutions, the positive is they are institutionally priced, but participants have to specify a point in time for starting benefits when there may be many unknowns.

In-plan solutions include: 

  • Non-guaranteed: systematic withdrawals and discretionary investment advice programs; and
  • Guaranteed: deferred fixed annuities, guaranteed minimum income benefit (GMIB) and guaranteed minimum withdrawal benefit (GMWB). 

For the non-guaranteed solutions, Pickett noted, the assets stay in the plan for a time which could translate to reduced plan costs for sponsors, but the sponsors must make sure the plan document allows for these solutions. Pickett said he believes GMWBs are the direction in-plan solutions will go in the future because participants will still have control of assets both before and after retirement.  

Cimmino said products are still in their infancy and will improve. Graham added that current product structures are more about addressing market risk rather than longevity risk.  

However, Cimmino warned that plan sponsors need to make a decision about retirement income products now, because participants in the “retirement red zone” (within five years before or after retirement) cannot wait for product improvements.