Guaranteed retirement income: Now advisors can come up with an “in-plan” plan

Interest in retirement income product development that would provide a guaranteed, steady income stream in retirement has recently resurfaced as a priority among asset managers and insurers. It’s been driven in part by legislation and in part by a growing desire among plan sponsors to retain participants in defined contribution plans after they retire.

Retirement income products are not new. The first in-plan solutions hit the market as far back as 2004, when MetLife launched an in-plan deferred fixed annuity where each contribution purchased a small piece of future guaranteed income. But cost and complexity were prohibitive and plan sponsors worried about liability related to offering such products.

SEI, in cooperation with the Retirement Leadership Forum (RLF), recently studied the topic, including why uptake has been slow and the reasons the timing might finally be right for in-plan retirement income solutions to gain a foothold. SEI and RLF released a paper, Innovations for in-plan retirement income, that examines why generating retirement income remains a problem in search of an adequate solution, what factors are driving renewed interest, and strategies to drive acceptance and adoption of in-plan retirement income.

“Despite the industry having more than 40 years to build solutions to solve the retirement income problem, plan participants are still largely on their own when it comes to the drawdown phase,” said the paper. The report pointed to a recent Prudential Global Investment Management (PGIM) survey of DC plans that found that only 17% offered managed accounts with retirement income features, 12% had in-plan annuities, and 5% had managed payout funds. Twenty-three percent of plans offered no retirement income solution at all.

New in-plan DC income solutions

However, since 2020, at least eight new in-plan defined contribution retirement income solutions have been launched by major asset managers and insurers, noted John Alshefski, SVP and managing director, SEI Investment Manager Services, and Robb Muse, president of SEI Trust Company (STC), president of SEI Institutional Transfer Agent (SITA) and VP of SEI Private Trust Company,

“Nearly 4 out of 10 firms surveyed told us they will launch a new retirement income solution within the next two years,” Alshefksi and Muse said. “The breadth of product solutions has exploded, but because it takes time to get these products through the 401(k) value chain (recordkeepers, advisors, consultants, TPAs), many plan sponsors are likely not aware of the range of solutions available to them.”

The SECURE Act of 2019 was the key catalyst for this renewed interest, said Alshefski and Muse. The SECURE Act 2.0, which could pass yet this year builds on the 2019 legislation and could further drive demand for retirement income solutions. Also driving increased product development is a desire on the part of plan sponsors to keep participants in plans after retirement. Retaining participants could help plan sponsors gain better pricing for their plans due to higher assets and would allow retirees to benefit from pricing and products in the plans that they might not have access to in a retail IRA.

Recent economic trends also could drive acceptance of such products. The stock market downturn that began in January 2022 has highlighted the perilous position of plan participants on the eve of retirement and the value of guaranteed income, according to the paper. All told, retirement accounts have lost more than $3 trillion in market value year-to-date as of mid-June 2022, according to calculations from the Boston College Center for Retirement Research.

The major challenge of offering retirement income within a DC plan is technology, the report said. DC plans were designed for saving, not for spending. Thus, recordkeeping systems typically lack the ability to distribute regular withdrawals during retirement, including complex annuity calculations, periodic automatic distribution capabilities and tools that help participants decide how much to annuitize. Recordkeepers estimate adding these capabilities could cost millions, said Alshefski and Muse.

New fintech solutions

At least two fintech firms are working on products that reduce the cost for recordkeepers to support in-plan products with technology that overcomes operational challenges:

• Micruity is a fintech startup looking to act as a centralized clearinghouse for annuity trading and settlement data.
• iJoin is focused on the participant experience with software that helps participants set goals around how much income they will need in retirement and to help them allocate to the most appropriate investments.

Renewed interest and momentum does not guarantee success, however. “History has shown that even well-conceived solutions can fail to find their way onto plan lineups and attract assets,” said the paper. As such, the authors recommend four strategies to build and grow in-plan retirement income products:

• Partner with recordkeepers. Because they are the conduit to the plan participant, broad-based recordkeeper implementation of in-plan retirement income products is critical to driving utilization.
• Support the development of “middleware” providers. Making it easier for recordkeepers to get the data needed to offer in-plan income products, technology-based middleware providers can help overcome the portability challenge.
• Integrate with advice products and services. Target date funds and managed accounts are now established as the standard for delivering in-plan advice to participants.
• Manage product costs. Plan fiduciaries often weigh cost above all other factors in evaluating investments for the lineup.

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel.