6 Obstacles to Retirement Income Adoption

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective. Still, some have said that this could be the year for retirement income—a combination of new offerings, volatile markets, and rising interest rates—and yet, it still seems that there are obstacles to overcome. 

Here are six:

1. There is no legal requirement to provide a lifetime income option.

Let’s face it, it’s a full-time job just keeping up with the plan provisions, standards, participant notices and nondiscrimination tests that are required by law. The notion that a plan sponsor would, in the absence of a compelling motivation take on extra work, and work that carries with it additional financial and fiduciary responsibility as well, doesn’t seem very realistic.

Indeed, with no legal obligation to provide this offering, and an underlying concern that providing the option does involve taking on additional liability…

2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”

I’ve never met a plan sponsor who felt that the guidance on offering in-plan retirement income options was “enough.”

I’m not saying they’re not out there—clearly there are in-plan options available in the marketplace now, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. That said, industry surveys (still) indicate that only about half of defined contribution plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. 

Now, over the years the Labor Department has tried to ameliorate those concerns, as recently as Field Assistance Bulletin (FAB) 2015-02. Perhaps more significantly, among the key elements of the SECURE Act that sought to expand retirement income awareness/availability was a new safe harbor. Essentially it says that when a plan fiduciary of a defined contribution plan selects a “guaranteed lifetime income contract” to be offered under its plan, the fiduciary will be deemed to have acted prudently if it follows the steps outlined in the law. In other words, it provides a specific road map to follow[i], and if it’s followed, the new safe harbor means that the fiduciary will not be liable if the insurance company later defaults on its obligation to participants who invest in the contract. Basically, the fiduciary must obtain specified representations from insurance companies about their financial soundness (and not have any information that contradicts those representations).

Of course, that safe harbor emerged in the waning days of 2019—just ahead of COVID, the CARES Act, and a fair amount of workplace/workforce disruption. It seems fair to say that the implications of its guidance have yet to be absorbed by most plan sponsors. Will it finally be “enough?” Time will tell.

3. Operational and cost concerns linger.

While several industry providers have offered what seem to be workable, effective solutions to the “portability problem,” plan sponsors remain concerned that the cost and complexity of transitioning these offerings—either by individual plan participants, or the plan itself—would be daunting, at best.  And that doesn’t take into account the educational challenges. 

Granted, there are a host of new and newly-branded solutions in and coming to market (check out our recent Retirement Income Buyer’s Guide for some insights)—but there remains a “learning” curve, and, at least in some cases, an UN-learning curve—for plan fiduciaries, and those who advise them.   

4. Participants aren’t asking for it.

Once you’ve walked through all the objections[ii] to in-plan retirement income options, it all seems to come down to this. Despite industry surveys that suggest worker interest in the concept (if not the reality) of retirement income solutions, it never seems to get to the level of expressing that interest to those who actually make retirement plan design decisions.

Sure, most plan sponsors acknowledge that participants (certainly older, longer-tenured participants) could use the kind of help that a retirement income structure could provide, and yes, plan sponsors are (still) looking for a more secure safe harbor, and they’d certainly welcome a PPA-ish “nudge” (along the lines of QDIAs) in that direction. At the same time large employers, anyway, have expressed interest in helping workers retire “on time,” and there is apparently increasing interest in retaining participant accounts in their plans. All in all, it seems that those interests would be well-served by a prudent, well-executed solution to provide a reliable retirement income alternative. 

That said, until it becomes an articulated concern for the workers they hope to attract, retain and eventually retire from their workforce, it’s likely that the adoption rate—by plans and plan participants—will be slower than might be hoped.

5. Participants don’t take advantage of the option when offered.

The so-called “take up” rates among participants can be sliced in different ways—by provider (the options are varied, after all), by participant age, even by the involvement of the employer in positioning in the option—but however you parse it, the word I’ve generally heard to describe participant adoption rates is… “disappointing.”

Not that those dynamics can’t be influenced by plan design or advisor input, but justifiable concerns remain about fees, portability and provider sustainability. Moreover, there are significant behavioral finance impediments—be it the overweighting of small probabilities, mental accounting, the fear of losing control of finances, a desire to leave something to heirs, or simple risk aversion. It’s often not just one thing. It’s… complicated.

To its credit, the retirement income industry has pretty consistently tried to overcome the objections raised with a series of product innovations. Unfortunately, that process has tended to make the offerings more complex AND more expensive. One thing for sure—if it’s not TDF-easy/simple to use, participants won’t.

6. (Most) advisors (still) aren’t promoting it.

Plan design can surely help steer participants toward these options, but most advisors I’ve spoken with say that, for a variety of reasons (mainly cost and complexity) these retirement income options are still sold, and not bought. Beyond that, the current advisory focus seems more targeted on wealth management—a perfectly logical emphasis for those with enough wealth to warrant it, but arguably beyond the needs of many retirement plan accounts.     

As an industry, we bemoan worker inattentiveness to the sufficiency of their retirement savings accumulations—and that’s with the aid and assistance of workplace retirement savings education, defaults for decisions like contribution amount and investments, and increasingly the availability of a retirement plan advisor. 

But let’s face it: When it comes to making a decision about a lifetime income option, or even evaluating the option, most workers are—still—literally on their own.

- Nevin E. Adams, JD

 

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[i] See Guaranteed Income: The Impact of the SECURE Act

[ii] See 7 Reasons Retirement Income Solutions Stall

The End in Mind

Could lifetime income disclosures undermine retirement savings?

Over the past several years, a growing amount of attention has been focused on the decumulations of defined contribution plan balances in retirement – and a sense that the emphasis on account growth, and account balances, glosses over the reality that at some point in the future those savings will need to be turned into a retirement paycheck.

Enter the SECURE Act, which among its numerous retirement-related provisions added the new “lifetime income disclosure” requirements to ERISA’s benefit statement rules. It applies to individual account plan benefit statements and the lifetime income disclosure must be provided in one benefit statement during each 12-month period. Simply stated, the new law requires that the participant’s total accrued benefit be expressed as a “lifetime income stream” in the form of a single life annuity and a qualified joint and survivor annuity, assuming the participant has a spouse of equal age. The assumptions for these disclosures will be provided later by the DOL.

While it’s generally assumed (certainly that was what the authors of SECURE hoped) that this presentation will help participants attain a more realistic perspective on their retirement future (or at least the sufficiency of the financial resources they have amassed for that eventuality), there has been some concern that the reality, certainly in the absence of counsel on how to improve those prospects, will discourage, rather than motivate saving. Indeed, that was a concern expressed at a gathering of ERISA attorneys here in the nation’s capital.

That puzzled me a bit – I’ve currently got my accumulated 401(k) savings spread across the plans of four different providers, and three of them have been projecting my retirement income for several years now. Now, because those balances are in different places, those projections haven’t been especially useful (though I know how to add), but still… providing those type projections may still be on the horizon for some, but it’s hardly a big leap. And I’ve not heard or read about any big slumps in savings rates as a consequence.

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Though it’s likely drifted from the recollection of most, back in May 2013, the DOL’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance (sound familiar?). The question then, as now, was – what impact, if any, would that disclosure have on participant behaviors?

Well, the Employee Benefit Research Institute (EBRI) included a series of questions in the 2014 Retirement Confidence Survey that would provide monthly income illustrations similar in many respects to those proposed to be provided by the EBSA’s online Lifetime Income Calculator proposal, and ask workers for their reaction(s).

What impact did that have?

Now, while there are certainly going to be differences resulting from a personal engagement (and there were some  differences in the assumptions,[i]) EBRI asked about their current account balances, and assuming retirement at 65, presented them with a monthly income figure. As it turned out, more than half (58%) felt that the illustrated monthly income was in line with their expectations.[ii] Considering those results, it is perhaps not surprising that the vast majority (81%) of the respondents indicated that they would continue to contribute what they do now after hearing the projected monthly income amount, while 17% replied that hearing this information would lead them to increase the amount they are contributing.

It remains to be seen what difference(s), if any, guidance from the DOL following the SECURE Act’s admonitions might have on the projections some (most?) recordkeepers are already providing, and how individuals, once presented with those  projections actually respond.

That said, the evidence we do have – the EBRI study and the anecdotal sense from the examples already in the marketplace – suggests that that “end in mind” focus will, at worst, have no impact – and at best, might well be the positive influence its proponents have hoped.

- Nevin E. Adams, JD

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[i]Of course, any such projection is necessarily required to make a number of critical assumptions – including future contribution activity, future rates of return, future asset allocation, and future annuity purchase prices. Other changes in assumptions were:

• Rather than using normal retirement age for the calculation, they asked about their expected retirement age.
• Since the age of the spouse was not known for married respondents, only the single life annuity income illustration was used.
• Given that the information was being provided to the respondent during a phone interview, only the projected monthly income (based on the projected account balance given the respondents’ reporting of their current balances) was provided.

[ii]On the other hand, 8% of the defined contribution participants said the monthly amount was much less than expected, though another 19% said it was somewhat less than expected.

A Not-So-SECURE ‘Act’?

The headline in a recent New York Times piece cautions that “Confusing Options May Be Coming to Your 401(k). It Could Cost You.” 

Those “confusing options”? Retirement income. And, ironically, they might undermine support for the most significant piece of pro-retirement legislation in a decade.

In fairness, the article begins by acknowledging to its readers that there might soon be some “welcome changes to the rules governing their retirement savings plans,” but quickly moves on to take to task the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which not only brings with it those welcome changes, but a key element that has some consumer advocates all atwitter (literally) – a fiduciary safe harbor for the selection of a lifetime income provider.

For years the retirement industry has bemoaned the lack of a lifetime income option in defined contribution plans. Indeed, for all the vaunted talk of the so-called “DB-ification” of DC plans, the latter has largely steered clear of embracing what is arguably one of the most compelling elements of DB plan design (aside from the completely employer-funded and managed aspects) – providing a pension, a stream of lifetime income.

Of course, in a DB plan, the cost and risk is on the employer, not only for the funding, but also for the provision of that pension benefit. DC plans have a very different dynamic, and DC plan sponsors have – largely – seen little upside in signing on for a decision that they see as carrying with it a liability that extends well beyond the employment relationship. Indeed, there have been any number of real and perceived reasons to avoid doing so (see 5 Reasons Why More Plans Don’t Offer Retirement Income Options).

The SECURE Act attempts to resolve some of that resistance – creating a legislative “safe harbor” in place of the one articulated by the Labor Department in 2008 and expanded upon in a 2015 Field Assistance Bulletin. Arguably, a legislative safe harbor is “safer” than one staked out by regulators, but plan fiduciaries hoping to find a fiduciary “free pass” won’t find one here, despite the concerns expressed in the Times.

‘Financially Capable’

The legislation states that a fiduciary is expected to engage “in an objective, thorough, and analytical search,” and that they must consider the financial capability of the insurer to satisfy its obligations, consider the cost (including fees and commissions) of the guaranteed income contract “in relation to the benefits and product features of the contract and administrative services to be provided under such contract,” and determine “at the time of the selection, the insurer is financially capable of satisfying its obligations under the guaranteed retirement income contract…”.

Now, unlike the regulatory safe harbor, the SECURE Act outlines some pretty specific criteria as to what would satisfy the financial capability tests, specifically that the fiduciary gets written confirmation from the insurer that they:

• are licensed to offer such products; 
• have operated under a certificate of authority from their state insurance commission at the time of selection, and for the immediately preceding seven years; 
• have filed audited financial statements in accordance with the laws of that state; 
• maintain reserves that satisfies those state requirements;
• have undergone, at least every five years, a financial examination (in accordance with those state requirements); and
• that they will “notify the fiduciary of any change in circumstances occurring after the provision of the representations” detailed above that “would preclude the insurer from making such representations at the time of issuance” of the contract. 

The SECURE Act goes on to clarify that while fees are a consideration, there is no requirement to select the lowest cost, and that the fiduciary may consider the value of the contract, including features and benefits and attributes of the insurer. It also states that the fiduciary will be deemed to have conducted the required “periodic” review if they receive the written representations from the insurer on an annual basis, unless they receive a contrary notice, or are aware of “facts that would cause the fiduciary to question such representations.”

Limit ‘Ed’

If all of those conditions are met, the SECURE Act goes on to limit the liability of the fiduciary for any losses “that may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the terms of such contract.”

While the fiduciary obligations to review and evaluate the insurer resonate with ERISA’s fiduciary admonitions, the concerns raised in the Times article seem to be twofold: that the mere existence of this new safe harbor will be touted as the free pass it most surely isn’t – and that the relative specificity of the conditions deemed to satisfy the financial capability test will result in a mere checkbox review – and that the checkbox – basically doing business in a state (and let’s remember that various states have varying requirements) while avoiding running afoul of those same state regulators – will serve as a back door for the annuity pitching “foxes” to enter the 401(k) “hen house” and those participant accounts to which they have long effectively been denied access.

Now, if in fact those results do flow from the SECURE Act’s implementation (and its integration with the Senate’s Retirement Enhancement and Savings Act (RESA)), there would be cause for concern. Certainly SECURE’s lifetime income provider fiduciary safe harbor is a more secure mooring for plan fiduciaries than the current landscape, if only because it provides some structure for the assessment of the financial capability of the product provider. That said, you could hardly be faulted, however it’s ultimately pitched, for not seeing a ton of daylight between that new safe harbor and the current fiduciary landscape. And the legislation, to my eyes, anyway, minces no words in reminding plan fiduciaries of the existing obligations under ERISA to assess, monitor, and review the conditions underlying the suitability of the lifetime income option as a prudent plan investment.  

Unless, of course, you’re reading the Times (instead of the actual legislation) – and you are concerned enough at the potential abuse that you’d consider withholding your support for the legislation, legislation it’s worth remembering passed the House by the kind of margin generally reserved for the naming of post offices.

Now, what the Times article gives voice to is a seed of distrust – viewing the safe harbor language not as a relatively modest means to encourage consideration of an option that experts have long said was needed, for which participants routinely express interest (in surveys, if not actual take-up rates), but that plan fiduciaries have nonetheless been reluctant to embrace.  

When all is said and done, this safe harbor may not be “enough” – but it is a step, and fear-mongering notwithstanding – it is arguably a step along a path to a retirement that is, indeed, more secure.

- Nevin E. Adams, JD
 
See also: Retirement Plans and Retirement Income: It’s Complicated.

‘Likely’ Stories

It is customary when sharing (or reading) the portents of a survey to focus on the actions that respondents say they have, or will undertake. But what about the things they say they will not do?

Human beings gravitate toward “norms,” of course. Plan sponsors, certainly those conscious of the personal liability that accompanies those responsibilities, can hardly be blamed for seeking the behavioral norms of their profession, drawing comfort from the collective movement of the “pack,” particularly with new and/or controversial ideas.

Large ‘Charge’

This past weekend I was reviewing Alight Solution’s 2019 Hot Topics in Retirement and Financial Wellbeing report. But, while the positive trendlines on things like financial wellness were interesting, what struck me in reviewing this particular survey were the (relatively) strong percentage weighing in on things they said they were notlikely to do, including:

• evaluate phased retirement alternatives (66% not likely to do)
• offer qualifying longevity annuity contract (QLAC) – 86%
• facilitate purchasing annuities outside the plan as options for plan distributions – 85%
• reduce the number of loans available – 86%
• allow terminated participants to continue loan repayments to reduce frequency of loan defaults – 67%
• offer student loan repayment assistance – 48%
• measure employee perceptions and/or suggestions for benefit improvements – 30%

Not to mention the more than half (53%) who said they were not likely to address lifetime income, a similar 51% were not likely to show projected health care costs in retirement projections, not to mention the 39% who were not likely to discourage cashouts, or the quarter (25%) who were not likely to do anything about minimizing leakage.

Additionally, 25% (up from 21%) had no plans to implement initiative to address the retirement savings gap, 27% (up from 25%) were not at all likely to project the expected retirement income adequacy of the population, and 29% were not at all likely to “offer services, tools, or education campaigns on debt management.”

‘Not’ Likely

While the survey cited an impressive two-thirds of surveyed employers responding they are very likely to take steps in 2019 to create or focus on the financial wellbeing of their workers in ways that go beyond retirement savings – and even though this percentage grew from 30% in 2014 to 65% in 2019 – fully one in eight of these very large employers said they were not likely to create a broad financial wellbeing strategy. And there was the 1 in 10 who said they were not likely to recognize retirement readiness.

It has, of course, long been accepted wisdom that trends among larger employers are instructive in anticipating movements down market – and, in fact, on many things it has been (a notable exception: automatic enrollment, which, a decade after the Pension Protection Act’s implementation, among smaller programs significantly lags adoption by larger plans). Mind you, this survey is based on the perspectives of not just large employers – but very large employers – that employ, on average, 44,500 workers – and 17,000 even at the median (although 2% of the respondents had less than 1,000 workers). Consequently, those trendlines might be meaningful for the plans with which you work (particularly larger employers) – then again, they may not.

More than that, one should, of course, be careful in reading too much into trendlines from one period to the next – it’s rare that the survey respondents in one period are identical to those in another, and thus the difference – be it positive or negative – but particularly when the jumps are large – might be nothing more than what one group of employers say they will do versus a completely different group at a different point in time.

Caution is also warranted in reading too much into statements regarding planned, or intended, actions. While they’re doubtless an accurate assessment of planned undertakings at the time, we’re all very aware of how often those good intentions get derailed by any number of unanticipated events.

That said, I’d argue that in contemplating future trends, there’s merit in spending as much time looking at what plan sponsors say they aren’t likely to do, as we do the possibilities.

- Nevin E. Adams, JD

6 Things Boomers Need to Know About Saving for Retirement

Several weeks back, I wrote a column entitled, “5 Things Millennials Need to Know About Saving for Retirement.” But what about those at the brink of retirement?

Retirement seems close — perhaps too close for the comfort of Boomers, some of whom have already begun cycling into retirement. In fact, the youngest element of this cohort (born in 1964) is now already 51, and it’s said that 10,000 Boomers roll into retirement every day.

That said, whether you’ve been saving or not, or not saving enough — here are six things Boomers need to know about saving for retirement.

1. Social Security won’t be as much as you think it will be.

When you were your kids’ age(s), you too were likely disdainful about the long-term prospects for Social Security (and hey, your kids weren’t around for the real funding crisis back in the early 1980s!). That said, you’re not only close enough to collecting; many of you are probably in the age group where when politicians talk about making changes, they’re careful to assure you that yours won’t be changed.

However, even if one assumes that the program remains largely unchanged from what it pays today, if you retire at full retirement age in 2015, your maximum benefit would be $2,663 a month, according to the Social Security Administration. Those who retire at age 62 (and many of today’s workers do, not realizing that waiting can translate into larger benefits) in 2015, your maximum benefit would be $2,025; and if you retire at age 70 in 2015, it would be $3,501.

Now those amounts are based on earnings at the maximum taxable amount for every year after age 21. In other words, that’s probably more than most of us would get. In fact, the average monthly Social Security retirement benefit for January 2015 was $1,328. Note that the maximum benefit depends on the age a worker chooses to retire, among other things — and that assumes that the current questions regarding Social Security’s longer-term financial viability are addressed, and/or that current benefit levels aren’t reduced.

2. Not everyone has a pension, and you probably don’t. And if you do, it probably isn’t a full pension.

Now, by “pension” I mean the traditional defined benefit (DB) pension plan, one that, in the private sector anyway, was largely employer funded. According to the nonpartisan Employee Benefit Research Institute (EBRI), in 2011, just 3% of all private-sector workers participated only in a DB plan, and 11% had both a defined contribution (DC) plan and a DB plan. So, only something like 14% of workers in the private sector still have a traditional pension plan (even then, it doesn’t mean there’s no reason for concern; see “3 Pervasive Retirement Industry Myths”).

That said, you’ve been in the workforce long enough (and during the right time) that you might actually have a pension, or at least a piece of one. Here’s the thing: People talk like the Millennials invented rapid job turnover, but the reality is that job tenure statistics have been relatively consistent going all the way back to the 1950s. What that means is that lots of workers who were “covered” by a pension plan didn’t work at those employers long enough to vest in that pension, or at least not long enough to vest fully. So, look back through your work history, check and see if those employers offered a pension. And you might want to check out thismissing pension tool from the Pension Benefit Guaranty Corporation (PBGC).

3. You won’t be able to work as long as you think.

I’m sure there are days when you would love nothing more than to be able to stay in bed (or at least not go to work). But industry surveys continue to suggest that not only do people expect to work longer, their retirement savings calculations seem to depend on it.

You hear people talk about 65 as the “normal” retirement age, even though it’s no longer that, even for Social Security benefits (aside from the reality that many still start collecting at age 62, unless you were born before 1943, your normal retirement age is 66 or older — you can check yours out here.)

Meanwhile, EBRI’s Retirement Confidence Survey (RCS) has consistently found that a large percentage of retirees leave the workforce earlier than planned — 49% of them in 2014, for example. Many who retire earlier than they had planned often do so for negative reasons, such as a health problem or disability (61%), though some state that they retired early because they could afford to do so (26%).

The bottom line: You probably shouldn’t count on being able to work as long as your finances may require. And that may require cutting back in the here-and-now in the interests of the there-and-then.

4. You could be missing out on ‘free’ money.

When you started working, if your employer offered a DC plan, you had to fill out a form in order to participate (you probably even had to wait a year), make investment choices, etc. These days a growing number of employers automatically enroll eligible workers in these plans, direct their savings into a default investment alternative, and even automatically increase that initial deferral rate each year. But even among those employers, most only automatically enroll new hires, not existing hires. And that could mean that even if you work for one of those employers, you might have been overlooked by these “auto” enrollment programs — and you might still need to go get one of those enrollment forms (or visit the plan’s website).

Your savings may well be matched by your employer (see “6 Things 401(k) Participants Need to Know”), so even if you’ve missed out on years of the opportunity to save and have those savings matched, there’s no time like the present to start — and start as aggressively as you can. After all, time is — literally — money.

5. You can use catch-up contributions to catch up.

Thanks to a provision in the tax code, individuals who are age 50 or older at the end of the calendar year can make annual catch-up contributions; up to $6,000 in 2015 and 2016 may be permitted by 401(k)s, 403(b)s, governmental 457s, and SARSEPs (you can do this with IRAs, as well, but the limits are much smaller). The bottom line: If you haven’t saved enough, these catch-up provisions can help. You can find out more here.

6. It’s not too late to start.

The reality is, without a sense of where you stand, what resources you have available, what your needs are and how long you have to prepare, it’s impossible to figure out the best way forward. But it starts with figuring out how much you’ll need. And for that, you might check out EBRI’s Ballpark E$timate — it’s free and easy to use. Then gather up those 401(k) statements, those IRA accounts, check for missing pension balances, and start saving!

- Nevin E. Adams, JD