Risk management sensitivities, workforce considerations and paternalistic feelings are the biggest factors in determining whether a plan sponsor will adopt this type of solution, Marc Pester, senior vice president of Prudential Retirement Institutional Income, said during a PLANADVISER webcast event sponsored by Prudential.
Risk Management Sensitivities
Plan sponsors who are in favor of an in-plan guaranteed retirement income solution think it will diffuse potential litigation about benefit adequacy, Pester said. “When we look at that role of the DC [defined contribution] plan today … there’s a need to address the risks associated that may compromise benefit adequacy,” he added.
Participants who are nearing retirement often invest more conservatively in fixed income or stable-value funds for fear of market volatility, but this can lead to smaller market return that will cause a longevity risk, Pester said. An income solution like a guaranteed minimum withdrawal benefit can provide an income safety net and address the longevity challenge, he added.
Plan sponsors who are against guaranteed income solutions are concerned about the fiduciary implications. Many plan sponsors are waiting for further clarity on the use of guaranteed income solutions. However, Pester contends that if plan sponsors use the safe harbor provisions found in ERISA section 404, they would not need to await additional guidance.
Safe harbor provisions paved the way for the success of target-date funds, which Pester said had low adoption rates before this, similarly to the resistance seen today in adopting guaranteed income solutions. “The market basically said, ‘This is a fad,’” he said. “There was a general view that this was not going to catch on.”
Plan sponsors are also concerned about fee-related litigation exposure, but Pester contends participants are aware that fees for protecting their income will be different than typical fees. “Knowing that you have protection, knowing that you’re not going to run out of money … obviously that becomes an important value that has to be part of the equation when you’re measuring fees,” he said.
Some plan sponsors want to demonstrate their leadership by becoming early adopters of guaranteed income solutions.
In addition, plan sponsors think these solutions can address the problem of the older workforce delaying retirement, according to Pester. The presence of an income guarantee can offer participants protection in an economic downturn, particularly helping older workers who are more greatly impacted by market volatility because they have fewer years before retirement to bounce back.
Plan sponsors who are against adopting a guaranteed income solution are concerned about the challenges associated with how to communicate this benefit and educate participants about it, Pester said.
Some plan sponsors with frozen defined benefit plans have adopted guaranteed income solutions to protect against recent capital market challenges. They are aware that the confidence level of participants is wavering, Pester said. “Paternalistic plan sponsors are moving forward to address the challenges associated with that,” he added.
Plan sponsors who are against adopting a guaranteed income solution are concerned about safeguard issues, Pester said. What happens if the insurer gets sick during this period? Does the solution have portability for both the participant and the plan sponsor?
Sponsors may be worried that companies that underwrite annuities or guaranteed income solutions will go out of business, but should this happen, the insurance commissioner for whatever state the provider is located goes to other insurance companies to cover the liability, Pester added.