ASPPA News from the Field
2013 Great Lakes Benefits Conference
CHICAGO– (July 1, 2013) At the recent Great Lakes Benefit Conference, I had the opportunity to co-present a session on Adequate Retirement Income/Longevity Insurance with attorney Bob Toth.
Defined contribution plans have now become the primary source of retirement savings for workers. Until recently, the primary focus had been the accumulation phase. With the realization that many workers are not adequately prepared for retirement, the distribution phase is now beginning to get the attention of the retirement industry.
Our presentation provided both a legal and practical overview of the scope of the problem by addressing the following questions:
Where are we today?
According to the Employee Benefit Research Institute 2013 Retirement Confidence Survey, employees are less confident now about having adequate retirement income than they were in past years. At the same time, however, they have a high confidence in their current economic situation. Realistic?
What exactly is “adequate retirement income?”
Adequate retirement income, simply stated, is measured by the replacement rate measure of
Some Measure of Retirement Income ÷ Some Measure of Pre-retirement Income.
But there is no “one size fits all” measure, and there are many stakeholders who view it differently (e.g., employee, employer, financial institution, public policy makers, etc.).
What drives retirement plan success?
If we measure retirement plan success by employees having adequate retirement income, then what matters most may not be obvious. While fees should justifiably be a concern, research has shown that what matters most is the savings rate—the amount that an employee contributes on a regular basis to his or her 401(k) plan.
How has the retirement plan industry responded?
The retirement plan providers have responded to the need by developing a number of products, some with unique plan design elements. In terms of market penetration, LIMRA reports that as of December 2012, assets in 401(k) plans with income guarantees totaled $2.2 billion covering 1.2 participants, most of which is in the small plan market (i.e., plans with less than $10 million). In terms of plan design, there have been three new “Lifetime Income” patents issued in the past three months.
Which is best: an in-plan or out-of-plan solution?
There is no right answer to this question. There are advantages and disadvantages for each approach. It’s one of those “facts and circumstances” situations unique to each plan sponsor.
What are the technical issues with in-plan products?
There are several technical issues including plan language, type of contract, reporting and disclosure, portability, etc., all of which should be carefully considered before adding a retirement income feature to a 401(k) plan.
What are the legal and fiduciary issues with in-plan products?
Both the Internal Revenue Service and the Department of Labor recognize the need to provide guidance to plan sponsors in the emerging area of providing retirement income as part of a 401(k) plan. Both agencies have clarified certain fundamental tax qualification and fiduciary issues.
The “annuitization of 401(k) plans” is a reality. Plan sponsors increasingly need help in evaluating, implementing and monitoring 401(k) income products. TPAs, advisors, attorneys, and other service providers can add much value to clients in this emerging area.