Waiting on an In-Plan Income Safe Harbor

Defined contribution retirement plan sponsors remain cautious and curious about structured withdrawal products.

A new survey suggests defined contribution (DC) plan sponsors are holding out for additional safe harbor regulations before offering more in-plan retirement income solutions.

According to the “2015 Survey of DC Viewpoints,” DC plan sponsors believe a comprehensive safe harbor for in-plan retirement income solutions is still the “most needed” piece of regulation heading into 2016. Advisory industry professionals expressed similar views, the report explains, taking an interesting turn away from a primary focus on fees, technology and client service trends.

“Concern about retirement adequacy across the system is keeping up industry professionals,” the paper says. “They would like plans to include a retirement income solution, and they favor a comprehensive safe harbor for such solutions.” 

Despite serious demand, it’s not likely the Department of Labor (DOL) will move quickly in this area. As discussed at the 2015 PLANADVISER National Conference by Glenn Dial, head of retirement strategy for Allianz Global Investors, the DOL apparently does not have plans to act soon in this area—especially given the fact that it addressed the matter as recently as 2014 in formal rulemaking. For that reason he is already an advocate of in-plan income solutions. 

“DOL is surprised that the industry still has cold feet on advocating for in-plan income and that sponsors feel they don’t already have the fiduciary protections they need,” Dial said. “They think that gave us a safe harbor already, and indeed they did. They want to know, what else do you feel you need? They think they have given enough clarification and guidance.”

According to the DC Viewpoints report, sponsors are increasingly receptive to these arguments, but they’re still pretty reluctant to break new ground. Primary points of concern include uncertainty around how plan sponsors may be held accountable for the actions of annuity providers once they have turned over participants’ assets—and the challenge of getting a good deal in the current interest rate environment. “Both plan sponsors and industry professionals selected the same top two reasons for not yet implementing a retirement income solution: (1) waiting for clearer fiduciary protection from the DOL and (2) waiting for products to mature and gain broader adoption.”

NEXT: Investment menus look a lot different

When asked directly, three-quarters of plan sponsors said they would be "more likely to offer an in-plan asset allocation option with a guaranteed income component if the DOL were to issue clearer fiduciary protection." The report suggests this percentage is "consistent with plan sponsors’ views in our 2012 DC Survey. Nearly half (47%) of plan sponsor respondents do not believe the regulatory developments in 2014 were enough and an additional 8% were not even aware that there had been some regulatory development in 2014 with respect to retirement income." 

The survey provides ample evidence of ongoing investment menu simplification, echoing a common theme heading into 2016: "Plan sponsors tend to offer over 11 investment options in their DC plans, with 38% offering 11 to 15 options, and 45% offering more than 16 options. Industry professionals tend to suggest fewer investment options. While a similar 38% suggest 11 to 15 investment options, 43% argue for 10 or fewer. This is consistent with the industry effort focused on streamlining investment menus."

Many sponsors further indicated they would be willing to radically shake up the investment approach used in their DC plan, with 42% suggesting they would be willing to use a menu of just three to four total investment options. "This is somewhat consistent with our 2012 survey results," the report says, "although the percentage not interested at all has increased by 10% (to 22%)."
Sponsors also remain focused on heading off fiduciary liability, with 68% indicating they would not work with an adviser who does not embrace the fiduciary relationship. Regarding important and ongoing money market reform from the SEC, 50% of plan sponsors and 56% of industry professionals believe plans will widely move to replace prime money market funds with Government or Treasury money market options. "The majority of respondents, both plan sponsors and industry professionals, believe there should be proactive disclosure to participants about gates and liquidity when retaining a prime money market fund in a DC plan."
Behind in-plan income solutions and fiduciary concerns, there is also strong focus (cited by 50% of sponsors) on managing fees and reducing all-in plan costs over the next 12 months. Still, "only 19% of plan sponsors indicated fees are keeping them up at night." One common undercurrent to the findings, the paper concludes, is plan sponsors' lasting interest in boosting plan participation and contribution rates, both for the sake of employee and employer.

The research is from Rocaton Investment Advisors and Pensions & Investments. The full survey results are reported online here.