The Institutional Retirement Income Council issued a report to help employers that sponsor retirement plans better understand and navigate through the maze of retirement income products that are emerging in the marketplace.
The brief examines each retirement plan product and offers steps employers can take as they consider offering them to their employees.
"As 401(k) plans have evolved from a supplemental retirement or capital accumulation plan to the sole retirement vehicle offered by most employers, plan sponsors and participants are increasingly focused on how to make accumulated money last a lifetime," said John Pickett, senior vice president and financial advisor at CAPTRUST and an IRIC advisor who authored the issue brief.
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"For most plan participants, the transition from work to retirement is one of the greatest challenges they will face. After spending decades earning a paycheck to provide for living expenses, newly-minted retirees are suddenly expected to know what to do to convert a lump sum of amassed savings into a monthly income stream that won't run dry."
To address this growing need, providers are offering a growing number of institutionally priced retirement income products. These include those that can be offered as an investment option inside an employer-sponsored retirement plan, or outside the plan as a rollover type program that helps participants in making decisions on how best to invest their nest egg once they retire and terminate from the plan. Some retirement plan products also offer income guarantees while others do not, but instead include "managed payout" or "managed drawdown" funds.
The issue brief, "Retirement Income Products: Which One Is Right for Your Plan?" presents a framework to help plan sponsors organize and evaluate the major types of retirement income products in the marketplace. It asks the questions: Do plan participants want or need a retirement income product? What is the best way to offer a product – as an option at point or retirement or as an investment option inside the plan?How important is it to offer a product with income guarantees?
When deciding whether participants need a retirement income product, plan sponsors will want to consider factors such as the average age of their workforce, average income of participants, average participant account balance, and their participants' demand for retirement income and acceptance of a lifetime income product.
The report also provides an in-depth discussion of the pros and cons of the products that are inside or outside of the plan and those that are guaranteed or not. The balance of the issue brief discusses the process that plan sponsors can follow for selecting a specific in-plan retirement income product. This includes a detailed discussion around the due diligence process, which involves evaluating the product's features, fees and expenses, the strength of the income guarantee and its portability and how the product will be communicated to participants.
"Although retirement income products are relatively new and may be unfamiliar to many employers, the process they follow to evaluate these products should not be fundamentally different than the process used to evaluate other, more 'traditional' retirement products. Employers should take the time and effort to understand the choices available in the marketplace and the cost and benefits of those choices for their participants," said Pickett.
The Institutional Retirement Income Council (IRIC) is a non-profit, membership-based organization of industry advisors who are dedicated to sharing best practices, informing about legislative and regulatory issues, and facilitating solutions for plan sponsors and their participants.
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