Participants who rely on average life expectancy in their planning could face a shortfall in retirement income. “The problem with averages is, it’s OK if you’re the average Joe or less-than-the-average Joe in the situation, but if you live too long or longer than planned, and you run out of money, that’s not a good position to be in,” Srinivas D. Reddy, senior vice president, Institutional Income at Prudential, told PLANADVISER.
To make sure retirees can match income with expenses, retirement income options allow participants to think in monthly terms. In this sense, they resemble defined benefit (DB) plans—“old school pensions”—that many companies can no longer afford, said Jason Chepenik, a managing partner of Chepenik Financial. They can, in fact, save plan sponsors money.
Reddy said that participants who do not save adequately for retirement might work longer. With older employees on the books, companies will face expensive payroll and health care expenses.
This raises the question: why don’t plan sponsors offer these options?
Reddy said he sees plan sponsors make statements like, “Well, I don’t want to be first”; “no one’s asking me for it”; and “I’m not sure what my liability is in the future if I do have it.”
Chepenik echoed their legal concern. “It’s a litigious society,” he told PLANADVISER. “Especially the 401(k) world today there’s much more focus on not making a mistake, and if you follow the past, it’s harder to make a mistake. If you do your own thing, you get called out for it.”
Another setback to retirement income options are the challenges for recordkeepers, who need to adapt their systems to store information like a participant’s age and contribution flow, data they do not need for mutual fund recordkeeping, Reddy said.
But recordkeepers do not have to retool their systems to accommodate the additional information needs alone. Companies such as DST Systems Inc. and SunGard offer middleware that attaches to a recordkeeper’s software and helps them implement the income option, Chepenik noted.
Despite the perceived setbacks, some companies are starting to offer these options. Last month, United Technologies Corp. said it would offer Lifetime Income Fund as its default investment option. (See “Default Investment Option Addresses Longevity Risk.”)
But retirement income options are still far from the norm, so participants are not asking for them. Citing Steve Jobs who created demand for innovative products, Chepknik said, “[Participants] don’t know what they want until they see it.”
Because of their lack of familiarity with the plans and “set it and forget it” stance toward retirement, participants might not flock to retirement income options.
Reddy recommends plan sponsors set retirement income options as their qualified default investment alternatives to drive enrollment. That way, participants who are not driven to enroll in the plan because of inertia can still reap the benefits.