Rebutting 7 Retirement Income Concerns

Two retirement industry experts recently challenged plan advisers and sponsors to get serious about in-plan retirement income backed by annuities. But instead of detailing the benefits, they flipped the conversation on its head and addressed critiques for these new, and sometimes controversial solutions.

“There are a lot of reasons of why a plan fiduciary might fear [in-plan retirement income options], but there are many other reasons they should consider it,” says Bonnie Treichel, founder and chief solutions officer at Endeavor Retirement, and co-author of “A Call to Action on Retirement Income: It’s Time to Solve the Problem.”

Bonnie Treichel

In the paper co-written with Matthew Eickman, national retirement practice leader, Qualified Plan Advisors, the pair note four key ingredients for retirement confidence: 1) greater savings, 2) access to vehicles that will make savings last for a lifetime, 3) guarantees or other protections to ensure the savings last and 4) education on how to manage through retirement.

The duo noted that, while the retirement plan industry has done a great deal on the first element in terms of auto-enrollment, escalation, and qualified default investment alternatives, the second and third are still lacking and in need of attention—with the education aspect in part depending on what is being offered.

Seven Rebuttals

Treichel and Eickman rounded up the most common pushback they receive when discussing retirement income offerings in their practices, industry group meetings and public forums. Those critiques and rebuttals, in summary, include:

1. Objection: There’s too much risk for plan fiduciaries to include annuities or other lifetime income options in defined contribution plans.

Rebuttal: The pair note that the U.S. Department of Labor, through the Setting Every Community Up for Retirement Enhancement Act of 2019, created a safe harbor specifically for lifetime income solutions with annuities.

Risk is a common objection concerning these relatively new retirement income options, even with the Safe Harbor, Treichel says. But there is “always risk when making decisions for a retirement plan,” she notes, whether choosing a particular investment option or deciding on plan design. “As long as you ensure that you are following a prudent process and practices, you will be managing that risk,” she says.

2. Objection: Retirement income options are difficult to evaluate or benchmark.

Matthew Eickman

Rebuttal: Treichel and Eickman note that investment firms have internal resources for evaluation, including insurance specialists who have expertise in annuity analysis in particular. Meanwhile, third-party vendors have begun offering lifetime income analysis and benchmarking for the emerging in-plan annuity market. The duo goes on to note that the safe harbor act provides protection so long as a fiduciary identifies the insurer offering the product, considers the costs, features, and benefits as well as the financial capability of that insurer.

3. Objection: Insurance annuities are too expensive to justify.

Rebuttal: The pair note that fiduciary responsibility is based on “reasonableness” of fees, so “expensive” is a relative term. They also note that the SECURE Act confirms that there is no requirement for a plan to offer the cheapest lifetime income solution, so long as the proper analysis is done as noted in objection #2.

“A fixed annuity product likely costs more than an S&P 500 index fund,” the firm wrote. “It should; it includes income protections.” Furthermore, the writers argue, DC plans will provide economies of scale to reduce fees. The pair goes on to provide a breakdown of the various dimensions a fiduciary should consider when deciding if fees are “reasonable.”

4. Objection: The vehicles are too complex or difficult to understand for both fiduciaries and end-user participants.

Rebuttal: The pair notes that, while complicated, lifetime income options are worth learning about because they can provide better retirement outcomes for participants—which is the overall goal.

“Ignoring a need because something is hard underestimates the magnitude of fiduciaries’ responsibilities,” the pair write. Meanwhile, they note that the marketplace, in part, will dictate which providers’ products will gain traction—those that are clear and transparent will “float to the top and gain greater acceptance among fiduciaries and utilization among participants.”

5. Objection: The solutions are all proprietary and the recordkeeper will dictate the available options—not the plan fiduciary.

Rebuttal: Treichel and Eickman concede that this is an area of concern. However, they note industry advancement that is seeing some of the country’s largest recordkeepers offering multi-insured or fully nonproprietary lifetime annuity income solutions by the end of 2024 and into 2025. Meanwhile, they note, a recordkeeper’s proprietary offering is “not inherently evil” and can be reviewed on its merits.

6. Objection: The in-plan annuity will not be portable for participants leaving a job or recordkeeper.

Rebuttal: The pair are concerned with the issue of a participant porting over the annuity to a new retirement plan. However, they note advancement here as well, with “middleware” software making it possible for auto portability among recordkeepers. 

“The middleware gives connectivity from recordkeeper to recordkeeper in a way that didn’t exist 10 or 12 years ago,” Treichel says. “As that technology evolves, it gives us the opportunity to have plan-level portability, which has been one of the big hurdles [to implementation].” Treichel also notes the importance of allowing for non-proprietary offerings by recordkeepers—something Empower advanced recently with an announcement it would offer a suite of in-plan and out-of-plan guaranteed income options for participants.

7. Objection: Participants aren’t asking for this solution—it’s an industry creation.

Rebuttal: Treichel and Eickman refute this claim by citing the research noting that a large majority of participants want a guaranteed paycheck in retirement—sometimes calling it the most important need for retirement security. 

“Not every plan must have an income solution,” Treichel says. “But it’s important for the fiduciary to consider the needs of the plan and the participant, and to go through a prudent process and gather the appropriate information to make an informed decision …. if you feel it’s too risky to even consider an income option, then you probably shouldn’t have a plan or be a fiduciary.”