Pension-izing employer-sponsored defined contribution retirement plans

Calls for “pension-izing” employer-sponsored retirement plans are increasing, but what exactly does that mean for workers, employers, benefit advisors, recordkeepers and other stakeholders?

BenefitsPRO: Why is generating retirement income increasingly important?

Michelle Richter: Because the proverbial three-legged stool that has traditionally formed the base of American retirement security – employer-provided defined benefit pensions, Social Security benefits and income derived from personal savings – has become far less sturdy. Why? Because of the decreased prevalence of defined benefit pensions, the low interest-rate environment making it difficult to generate the levels of income that were possible in higher interest-rate environments, and the highly publicized funding challenges of Social Security.

We will soon as a society feel the impact of decreased DB pension prevalence. According to the Center for Retirement Research at Boston College, among American households headed with an individual born in 1945, just over 50 percent were covered by a DB pension. For households headed by a person born in 1952, only 30 percent were covered, and for those headed by someone born in 1979, that percentage dropped to about 10 percent. So while members of the Greatest Generation currently in retirement rely heavily on these DB benefits, most boomer households will not be so fortunate.

What are the challenges that employers face?

In determining how best to help employees save for retirement, employers are tasked with both establishing appropriate benefits plans for their employees and then educating them about such plans. Employers are a trusted source of information, so a high legal standard is placed on employers and their fiduciary advisors in providing cost-efficient and value-rich solutions for employees.

Employers must themselves get educated on how evolving regulatory standards impact them and their choice of offerings before they can then determine what offerings to make, and how to educate employees on those offerings. This increasing complexity makes relying on professional benefits advisors who specialize in these matters a prudent choice for employers, both from a legal standpoint, and from the perspective of wanting to get for their employees the absolute best solutions available for a given level of resource.

What solutions are available?

In-plan and out-of-plan income solutions, guaranteed or non-guaranteed income, default or opt-in solutions, and professionally managed versus self-directed options all exist. Following passage of the SECURE Act, product development for income solutions took off. We are beginning to see in market this new generation of solutions, and we will see many more enter the market in 2022.

Because this market is evolving so rapidly, it is imperative for defined contribution stakeholders to have up-to-date, unconflicted information sources upon which they can rely. The IRIC, as a non-profit think tank that serves plan sponsors, recordkeepers, asset managers, insurers, advisers, technologists and other stakeholders in the defined contribution community, is working nonstop to compile and disseminate educational materials covering these developments.

In such programs, how would advisors and recordkeepers be compensated? How would such programs leave assets in-plan but relieve sponsors of the burden of administration and participant tracking?

We don’t suggest changes to existing compensation structures. As for your second question, the nature of “in-plan” is such that these cannot be divorced, although middleware providers are easing some of the technological challenges that arise from the need for insurance companies to communicate with recordkeepers to enable true in-plan solutions. With that said, more simplified “via plan” income offerings are beginning to be made available, in which a dedicated portion of plan assets are systematically rolled over to an individual retirement annuity.

BlackRock’s LifePath target date fund series offering with Brighthouse, Equitable and Voya is one example of a systematic, via-plan income solution.

Some say we’re just in a “beta” phase of having retirement income in-plan. I am in this camp. Some say technology solutions will enable it. I am also in this camp – for industry insiders, the evolution of middleware is what to watch in 2022. Its success or lack thereof will determine the future of in plan income offerings.

Anything else you would like readers to consider?

Get educated on how plan-derived income solutions are evolving, for example, by visiting iricouncil.org. Also, plans should consider the benefits of hiring a fiduciary benefits advisor.