Says WTW's Dana Hildebrandt, "To ultimately breed real momentum for income solutions, sponsors will need to see adoption by other plan sponsors." (Photo: Shutterstock)
Delivering retirement income solutions in defined contribution plans—referred to in industry as the "last mile"—presents a significant challenge that will require deeper coordination among lawmakers, regulators, service providers, and employers.
Nevertheless, a "perfect storm" of opportunity is on the horizon, says Dana Hildebrandt, a director with Willis Towers Watson.
"It's difficult to say how long it will take, but we are closer than we have ever been. That I can say with certainty," said Hildebrandt, who specializes in developing retirement income solutions for sponsors of large and jumbo retirement plans.
New data from a survey of 160 plan sponsors shows more are adopting some form of lifetime income option, and more are considering doing so in the near future.
Nearly one-third of sponsors have implemented some form of income strategy, up from 23 percent in WTW's 2016 survey, and 60 percent say they are looking to do so in the coming years.
Product innovation from money managers and pending legislation in the Senate that addresses adoption of annuities in 401(k) plans is setting the stage for further adoption, said Hildebrandt.
"On the product side, the future is now," she said. "Investment managers are already solving for the problem by incorporating guaranteed income components in target date funds. And on the legislative side, never in history has there been such a pointed focus on the decumulation of savings."
In this year's survey, 51 percent of sponsors said they were reluctant to offer annuities in retirement plans due to fiduciary risk.
A provision of the Setting Every Community Up for Retirement Enhancement, or SECURE Act, creates an annuity selection safe harbor for sponsors. Under current Labor Department guidance, sponsors have to account for the future solvency of annuity providers.
"Sponsors have said, 'that's not my job'," said Hildebrandt. "What SECURE seeks to do is shift sponsors' assessment of insurance companies' solvency to state insurance regulators."
The bill also includes the Lifetime Income Disclosure Act, which requires an annuitized estimate of savings on 401(k) account statements.
"That provision is kind of a slam dunk. Any level of information that motivates people to save more is a positive," said Hildebrandt.
A third provision of the bill allows individuals to carry annuity holdings from plan to plan when they change employers.
What the bill does not do is address that portability issue at the recordkeeper level.
"It doesn't do anything to motivate recordkeepers to include annuities, which is what I feel we need," said Hildebrandt.
Offering annuities would require new technology investments in recordkeepers' platforms. And some recordkeepers that also offer retail investments may fear in-plan annuities could cannibalize rollovers, said Hildebrandt.
A 2016 Government Accountability Office study recommended wider alignment with recordkeepers to help solve for slack adoption of retirement income options in 401(k)s.
"There needs to some impetus to increase recordkeepers' motivation," thinks Hildebrandt.
But ultimately, if the future of workplace savings plans is the inclusion of retirement income offerings, sponsors will have to lead the way.
"Everyone is afraid to be the first mover," she said. Of the sponsors in WTW's survey who don't offer income options, nearly half said they are waiting for wider adoption among other sponsors.
"Sponsors are afraid of getting sued," added Hildebrandt. "Everyone gets hurt when sponsors are waiting for others to act. In order to ultimately breed real momentum for income solutions, sponsors will need to see adoption by other plan sponsors."
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
