Defined contribution sponsors’ approach to offering in-plan lifetime income options, such as a annuities, is illustrated by a series of recent surveys by different organizations that reach the same conclusion — relatively small percentages of sponsors provide them.
For example, a survey by Alight Solutions, Lincolnshire, Ill., to be published this month, found that 9% of DC plans offer an in-plan annuity or other insurance products. Of those that don’t offer these options, 84% said they aren’t likely to offer them and only 1% said they were “very likely” to offer them.
The top “major reason” for avoiding in-plan options were fiduciary concerns (60%, up from 53% in the previous year’s survey); operational or administrative concerns (52%, up from 40%); waiting for more products (50%, up from 45%); and cost (30%, up from 17%). Alight surveyed 131 DC plans with 5.5 million participants.
The Alight survey, like the others in this article, were conducted before the SECURE Act was signed into law Dec. 20.
A survey by Callan LLC, San Francisco, released Jan. 9, reported that 9.1% of DC plans offered in-plan guarantee products in 2019 vs. 4.1% in 2018 and 8.9% in 2017.
The biggest reasons for not offering annuity-type products were lack of clarity or comfort about fiduciary implications; a belief the products aren’t necessary; a lack of participant demand; and concern about insurer risk. The latest survey covered 114 DC plans, most of which were 401(k) plans. The number of respondents varies each year.
“The SECURE Act is great,” said Greg Ungerman, Callan’s senior vice president and defined contribution practice leader, adding that the law is the biggest improvement to the DC industry since the Pension Protection Act of 2006.
“It won’t open the floodgates” for sponsors to add in-plan options, he added. “Sponsors still need to do due diligence.”
The latest annual survey by the Plan Sponsor Council of America, Chicago, published in December 2019 and reflecting 2018 results, found that 9.8% of the 608 respondents offered in-plan annuities. For PSCA’s 2018 survey covering 2017 results, 9.3% of plans offered in-plan annuities.
An October survey by NEPC LLC, Boston, and Pensions & Investments illustrated that although sponsors like the idea of in-plan annuities, they don’t often practice what they preach.
When asked about the best way sponsors can make sure participants don’t outlive their assets, the top answer among seven choices for all sizes of plans (42%) was an annuity or “other retirement income offerings.”
However, when plan executives were asked what they offer to mitigate longevity risk, in-plan annuities placed a distant fourth among all plans (with 17% of respondents) out of seven choices. Target-date/asset allocation funds with insurance guarantees or other annuity-like features (9%) placed fifth.
The top choices were a target-date series with a “through” glidepath; fixed-income options; and a target-date series with a “to” glidepath. Multiple answers were allowed.
When executives of all plans were asked if they would they have an in-plan solution in the next five years, 48% said no, 35% said yes and 17% said they already had one, according to the online survey of 169 employers with 220 DC plans —corporate, public, non-profit and union.
“Lifetime income still feels inaccessible despite a discussion over 10 years,” Ross Bremen, an NEPC partner, said in a recent interview.
Even with the enactment of the SECURE Act, “I don’t think we’ll see a tidal wave in the next weeks or months,” he said. “There will be a lot of discussions. Conceptually, the support is there.”
He expects sponsors will take a closer look to “evaluate the pros and cons” of existing products as well as new products offered by providers that are encouraged by the safe harbor provision in the SECURE Act. Still, new products — not just for retirement income — typically don’t get rapid, immediate acceptance by sponsors or participants, he said.