RETIREMENT INCOME IN DC PLANS: THE NEXT EVOLUTION IN PLAN DESIGN
This article, published in Benefits Magazine, presents current retirement income challenges faced by participants in DC plans and the opportunities for employers to leverage their resources to make a positive financial impact on their employees’ retirement. Defined contribution plans (DC plans), such as 401(k), 403 (b) and 457 plans, are now the most common type of retirement plans in the private sector for US employers. While features such as auto enrollment and auto escalation have been implemented to overcome issues in DC plans, participants still face the problem of turning their savings into reliable retirement income. This issue persists because participants commonly receive a lump-sum payment upon retirement or termination of employment. This means that participants have to make decisions on their own as to how to generate income in retirement, which is difficult due to varying levels of financial literacy and lack of motivation to develop and follow a retirement plan. Moreover, low and middle income participants may not have access to competent and unbiased financial advisors and institutions for help. To overcome these challenges, plan sponsors can help retiring participants by implementing retirement income programs in their plans. These programs are mechanisms that convert a participant’s account balance into periodic retirement income, which include disclosures and communications to help participants make informed choices. After taking into account a retiree’s circumstances, a plan sponsor could offer at least one retirement income generator (RIG) from each of the three categories: systemic withdrawals, annuities and period-certain payouts. Default options such as required minimum distributions, in combination with a qualified default investment alternative such as a target-date fund, may be attractive to plan sponsors. Plan sponsors are good candidates to do this because they can use their bargaining power, scale, ability to standardize, and distribution efficiency to improve the retirement security of participants. Barriers still remain as the majority of plan sponsors feel limited by fiduciary liability and administrative complexity; however, they can be overcome through simple solutions such as offering three types of retirement income generators (RIGs), instead of just one. By implementing retirement income programs, employers have the opportunity to positively impact employee’s lives by helping them retire with confidence and security, preventing employees from living in poverty in retirement; and, through institutional pricing, significantly increasing the amount of retirement income that participants might receive.