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Plan Advisors And Guaranteed Income

Do retirement plan consultants have a fiduciary duty to bring guaranteed income products to retirement plan sponsors? 

According to a 2015 study from the Washington, D.C.-based National Institute on Retirement Security, “Some 82 percent (of respondents) say a pension is worth having because it provides steady income that won’t run out, while 67 percent indicate that they would be willing to take less in salary increases in exchange for guaranteed income in retirement.”

One might expect that plan sponsors have responded by offering lifetime retirement income options to participants. Hardly. The 2014 Towers Watson North American Defined Contribution Plan Sponsor Survey Report found that only 12 percent of companies offer lifetime income options in their defined contribution (DC) plans. That’s double the 2012 result, but the growth outlook is weak because only 12 percent of companies are considering adding these options. The primary reason (given by 57 percent) for the paucity of income solutions: Lack of participant demand.

What’s Missing?

Prudential Retirement’s IncomeFlex Target® product has over 7,200 plans and about 100,000 participants have adopted the product, according to Srinivas Reddy, senior vice president, head of full service investments for Prudential Retirement in Hartford, Connecticut. The product’s predecessor, IncomeFlex, launched in 2007. Despite that longevity and subsequent growth, Reddy acknowledges it’s been slow going. “When you look at the U.S. workforce of 75 million, obviously, it’s a much smaller number of the total pool and we have a long way to go,” he says. (The Institutional Retirement Income Council’s website,, provides additional background on the available retirement income solutions.)

Reddy also attributes a general lack of knowledge about retirement income solutions among sponsors and participants as the reason for low adoption rates. Most employees don’t know that these solutions exist so they don’t raise the topic with their employers, he maintains. Jamie Greenleaf, lead consultant with Cafaro Greenleaf in Red Bank, New Jersey, cites two factors factors for income solutions’ slow uptake. The first is that plan sponsors lack a solid understanding of the in-plan guaranteed income options’ fiduciary requirements. She believes the second problem is that some adopting plans have done a poor job showing participants how to utilize the options properly in their retirement plans.

Shifting the focus

Sources agree on the need to shift employees and sponsors’ focus from asset accumulation to retirement income or decumulation. Workers don’t understand how much money it takes to generate a lifetime income, particularly in a period of low interest rates and increasing longevity. Dorann Cafaro, senior consultant with Cafaro Greenleaf, has found that plan participants do not equate their plan balances with income and instead focus solely on their savings balance. “If they really could see that they’re only going to get $300 a month to live on in retirement [from their savings], that would certainly make them much more aware of the fact that these retirement saving accounts are not about just accumulation but are about income of retirement,” she says.

Reddy says the sponsors’ concerns “boil down to basically two questions.” The first is the sponsor’s role as a fiduciary with income solutions as it pertains to insurer selection. If the insurer encounters financial problems, does the sponsor have additional obligations? Some sponsors are satisfied with the Department of Labor’s guidance on this topic while others are not, he says. The second question is, “What happens if I want to either stop offering the current version of the product, move to a different record keeper or offer a different product altogether. Participants have already paid for a guarantee; how will they retain the value of the guarantee?” says Reddy. He believes the industry’s work to increase account portability has partly addressed that concern but acknowledges there are still unresolved questions that concern sponsors.

Worth Offering?

Given lifetime income solutions’ slow adoption rate so far, is it worthwhile to discuss these products with clients? Cafaro unequivocally says yes. Advisors have a fiduciary duty to show sponsors solutions that can be in the best interest of their participants, she says. Consequently, the in-plan guaranteed income solutions should be shown, at least.

Greenleaf seconds that view from a business perspective. Investment volatility’s impact on retirement balances can cause older workers to remain on the job longer than they would with a guaranteed retirement income. Employers then face the risk of having those workers drive the company’s health care costs higher. “If we (consultants) are to mitigate risk then we need to be looking at how can we make our participants feel comfortable about pulling that trigger to retire and thereby removing them from your population of employees that are going to start to cost you money as they age at their desk,” she says. “I think consultants are going to have to start to address that.”

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