By all accounts, the 401(k) and defined contribution is a huge success moving in the right direction with higher account balances, contribution rates and participation with increased coverage imminent through state and federal mandates.
On the other hand, these payroll deducted, participant directed plans are a stunning failure leaving people to deal with even a bigger problem than accumulating retirement assets. It’s as if we offer a guided trip to an ideal travel destination and, halfway through the flight, the professional pilots parachute off leaving the passengers to land themselves.
The answer is quite clear, as is the demand – in-plan retirement or guaranteed income. But what are the impediments and how do we overcome them?
“When asked if they want guaranteed income to replace their paychecks, most people respond positively,” notes Mike DeFeo, head of DC distribution at Allianz Life Financial. “But when asked about whether they want to invest in annuities, the results are very different.” Michelle Richter, executive director at the Institutional Retirement Income Council and principal at Fiduciary Insurance Services, agrees. “65% of consumers desire the attributes of annuities.”
That’s because many retiring DC participants fall prey to the unscrupulous brokers that dominate the K-12 non-ERISA market selling annuities. “Plan sponsors are paternalistic concerned about the high fees and lack of flexibility with annuities,” said Matthew Wolniewicz, president at Income America. These concerns are both driving plan sponsors to consider in-plan retirement income while also muting demand when annuities are offered as the solution.
“The combination of fewer defined benefit plans, inflation deflating Social Security benefits and longevity are driving demand for guaranteed income,” notes John Faustino, head of Fi360, a Broadridge company. “The lack of a standardized due diligence process like with mutual funds, technology to allow for portability and regulatory guidance is not helping.”
So if the demand for guaranteed income and paycheck replacement is so high, what are the impediments and solutions? We have effectively used the workplace to help people save – Fidelity notes that IRA and 401(k) millionaires increased by more than 30% in Q4 2021 as did contributions – why not offer in-plan retirement income at work?
Like with all new features in DC plans, agreement is needed by three unrelated parties – plan sponsors, advisors and record keepers. It’s hard to get three parties to agree on anything. “Insurance and retirement providers are traditionally technology challenged,” states Michelle Richter. “We need middleware to help them speak to each other.”
Though Allianz is working with smaller providers through Relius, a popular record keeper software platform, the industry needs the Fab 5 to adopt retirement income products. “Though insurance providers may be reluctant to offer and record keep other companies’ services,” comments Matthew Eickman, national practice leader at Prime Capital Investments, “Just like with other investments, they need to open up their platform the products that are portable to remain competitive.”
Retirement income is more like target date investments where more than one may not be necessary so it will be difficult to convince those providers with proprietary products to offer or record keep other providers products or to spend money to upgrade technology for the privilege.
Plan sponsors must be convinced to allow participants to stay in the plan when they terminate but there’s a growing willingness as their plan and investment fees decrease with more assets and third parties are available to keep track of terminated employees.
The key is RPAs who need to advocate on behalf of their clients to have their record keeper partners offer in-plan guaranteed income. “Advisors are leery to offer products unless they are experts,” notes Mike DeFeo. According to Matthew Eickman, “RPAs don’t want to recommend a product that is not widely available.”
“The SECURE Act was supposed to do for retirement income what the 2006 Pension Protection Act did for target date funds,” states Matthew Wolniewicz. “But we have so far missed the boat due to Covid.”
Along with the SECURE Act, a recently proposed bill to allow retirement income as a QDIA, the Department of Labor’s guidance encouraging access to lifetime income shows that lawmakers are sympathetic. But education is essential especially for RPAs not accustomed to selling annuities as is technology that allows for transferability of products.
Just like any new service, everyone must win. It will not happen just because it is supposed to unless the government forces the issue. In the war for talent, retirement income can be used to attract and retain employees. RPAs need to offer more than fees, funds and fiduciary services and even more than the auto-plan all of which can be made available by dabblers willing to cut fees.
Record keepers have to be paid on these new products to justify the expense to upgrade technology to service non-proprietary products. Just as important, larger RPA firms and plan sponsors must push for in-plan guaranteed income that is cost efficient, flexible and transferable or else move their business elsewhere. That’s how new products are introduced into the DC system.