Non-guaranteed 401(k) income solution: A new in-plan 'annuity' option to offer workers

When thinking about how to address the decumulation phase of retirement saving, plan sponsors have several options to offer guaranteed retirement income products through an insurance company. However, plan sponsors also have the option to offer Non-Guaranteed Retirement Income Payout (NGRIP) solutions to plan participants, which shift investment and longevity risk to the retiree.

Both guaranteed and non-guaranteed payout options have pros and cons. Retirees may prefer NGRIPs over guaranteed income options due to flexibility and lower costs, according to the Institutional Retirement Income Council, which recently published a paper about NGRIPs.

The underlying investment portfolio can use the same investment options available under the accumulation stage of the plan or the plan can make other investment options available. Typically, different options are offered with different investment risk profiles, said IRIC. The retiree generally has access to the account balance at any time and at death, any remaining balance is payable to the retiree’s designated beneficiary.

There are a variety of ways to determine the initial payout and period changes of NGRIPs, including a percentage or flat dollar amount, a required minimum distribution factor or an actuarial approach. After the initial payout, it is common for payout amounts to change, and subsequent payouts are usually related to how the initial payout was determined, the organization said.

IRIC Executive Director Michelle Richter-Gordon explained some of the nuances of NGRIPs.

Q. How do NGRIPs work? Since they are not insurance products, who offers or manages them?

A. NGRIPs are a service offered by a recordkeeper. At the request of the retiree, payments are made monthly from the plan. The plan recordkeeper keeps track of how much is being paid and provides for tax withholding and tax filing. They are no different than an IRA where the retiree is taking automatic monthly payments

Q. Are NGRIPs a new concept? How has uptake been? 

A. They are not new. There are some plans that already provide this service. Many recordkeepers are now able to offer non-guaranteed periodic income payments. It would be good to see more plans use them.

Q. Why should employers consider offering NGRIPs? 

NGRIPs allow retirees to keep their money in the plan which could lower overall investment management fees and retain assets in plan for longer, which helps sponsors achieve economies of scale, as well as ensures that the employee’s assets remain overseen under the care of ERISA’s fiduciary protections.

Q. What are some things employers should know about offering NGRIPs in terms of fiduciary responsibility and best interest of employees?

A. Employees say they want guaranteed income but they seldom elect them. NGRIPs are very compatible with a plan sponsor also offering guaranteed solutions though they would not have to be part of a broader retirement income suite of services to be legitimately offered. For those participants desiring efficient income solutions that do not want to be locked into a guaranteed product, NGRIPs are an effective way for sponsors to help. Consider Empower’s recent announcement of a suite of retirement income solutions that includes four different ways Empower‘s new solution suite seeks to encourage retirement income. According to Empower’s survey, approximately 60% of plan sponsors say they will likely focus more on helping participants convert their plan account balances into income. More than 80% of advisors and consultants believe a defined contribution (DC) plan should offer services supporting plan participants’ retirement income needs. This suggests that both advisers and plan sponsors as talent recruiters are expected to need to become experts on plan-derived income in order to remain competitive.

Related: Is this the year of in-plan retirement income solutions? 401(k) trends to watch in 2024

A. NGRIPs allow a smooth transition from accumulation to decumulation for participants and sponsors desiring to retain participants through retirement. They provide flexibility and lower fees than either a guaranteed income product could offer or are likely to be accomplished through withdrawals from an invested IRA. The decision to add an NGRIP payout function would be a business (settlor) decision – fiduciary liability for the sponsor is unchanged (same responsibility it holds when the participant is in the accumulation stage). As with all product and service additions to a plan, education and communication with participants is key to driving engagement and success for the solution.

Q. What are the benefits of NGRIPs for retirees? 

A. Lower fees than an IRA and more flexibility to an income stream than a guaranteed product can offer.

Q. What are the risks of NGRIPs? 

A. There is no guarantee that the money will last for a lifetime.