Long after defined benefit (DB) plans became scarce in the private sector, many employees still mourn their departure. With DB plans, participants are given an estimate of their monthly benefit at retirement. However, with defined contribution (DC) plans, participants often lack confidence in their understanding of how much their DC plan will provide in monthly income when they start drawing down their accounts. More and more 401(k) plan sponsors are beginning to try to address this concern in various ways — without revisiting the DB plan model.
A look at the numbers
According to a survey by Alight Solutions released earlier this year, more than half (57%) offer a distribution option that allows participants to “elect an automatic payment from the plan over an extended period of time.” That isn’t the same as telling participants how much they can sustainably withdraw over the course of their retirement. But 76% of those sponsors polled (up from 66% in 2018) give participants access to tools to help determine how much they can spend each year in retirement, so that they can take full advantage of the automatic periodic distribution options.
One such tool is a lifetime payout calculator. Many different companies — often those selling financial services — provide these calculators on the Internet, and participants can take advantage of them. Some, including one created by the American Institute for Economic Research, are offered by entities that aren’t also selling financial services. Encourage participants to sample multiple calculators before choosing a sustainable distribution rate.
Although spending unsustainably in retirement is an important concern, so too is underspending. Retirees with a limited understanding of what a sustainable spending pattern looks like are at risk of living far more frugally than they would choose to if they knew better.
How to help participants
The Alight survey also trained a spotlight on more proactive practices to help participants create a sustainable payout in retirement. In particular:
- 47% (up from 39% in 2018) offer managed account options within their plans that allocate participant assets for income and manage annual payouts,
- 18% have “managed payout funds” that feature a “specific annual target payout percentage with no insurance guarantees,”
- 11% incorporate annuity or insurance products, such as guaranteed minimum withdrawal benefit plans and fixed annuities, as part of their fund lineup, and
- 9% help participants and retirees purchase annuities “outside the plan as options for plan distributions.” The percentage of sponsors taking this approach dropped in 2019 from 15% in 2018.
If those numbers sound high, it could be due to a survey database consisting primarily of very large employers. Regardless, what works for large plan sponsors often also works for smaller ones.
Reluctance on “in-plan solutions”
The same survey asked the majority of sponsors that don’t intend to offer in-plan income solutions, such as annuity options, why they hold that position. Most cited fiduciary worries, “waiting to see the market evolve more,” and operational considerations. The fiduciary concerns stem from a perception that sponsors could be held liable for problems caused by an annuity provider implicitly endorsed by the sponsor because it’s been given easy access to participants.
This isn’t a new worry, and some legal guidance suggests that sponsors can be held responsible only for decisions that overlooked troubling information that was available when a sponsor added an annuity provider to the plan’s lineup of lifetime income options. Although legislation has been introduced in Congress to make it less of a worry, so far none has been enacted.
A top priority for many plan sponsors is ensuring that participants will have accumulated sufficient assets to retire when they want to. Helping them avoid prematurely draining their savings in retirement is a natural extension of this goal.
Keeping assets in-house
As the Alight Solutions survey in the main article makes clear, incorporating an annuity option within a plan is only one of several options plan sponsors can pursue to help participants on the threshold of retirement, or in retirement.
For example, back in 2015, MGIC, a mortgage insurance company, began giving retirees the option of receiving automated periodic distributions. Retirees can choose to receive payments either monthly or quarterly. Part of the company’s motivation for doing so was to discourage them from rolling their assets into an IRA, and thus out of the plan. Why that concern? MGIC worried that retirees could be left “in a vulnerable place” by doing so, a company executive stated.
In keeping with that view, the Alight survey indicated that only 5% of employers want retired or terminated employers to pull their assets out of the plan, down from 11% in 2014. One third prefer that participants keep their assets in the plan, and the remaining 62% expressed no preference one way or the other.