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The In-Plan Retirement Income Dilemma

With soaring demand, will it take hold this time?

At a recent TPSU training program, in-plan retirement income was brought up by a couple of defined contribution plan sponsors. A plan sponsor at a large company complained it is still too complicated and this person has no other job other than to oversee the retirement plan. Another asked how the industry is addressing the decumulation issues, which will be needed if DC plans are really going to replace defined benefit plans.

At this week’s RPA Retirement Income Roundtable and Think Tank in New York City hosted by, leaders from record-keepers, broker/dealers, aggregators and service providers gather to discuss how to meet the growing demand and overcome the obstacles.

And the demand for guaranteed income is palpable by plan sponsors and especially participants as they get closer to retirement. The DC industry has done a fairly good job at helping people accumulate assets with over $9 trillion in DC plans and more than $11 trillion in IRAs, but has not really addressed decumulation. As UCLA professor Shlomo Benartzi explains, we are taking people on a trip to retirement, putting them on a plane with professional pilots through auto features and halfway through the trip, the pilots parachute off leaving everyone to land themselves.

Which raises one of many conundrums the DC industry faces as we try to retrofit DC plans. Each participant is managing their own personal DB plan, which is untenable.

And there’s a reason that twice as many people with a financial advisor own an annuity as those without one, which is 97% of DC participants. Annuities are complicated, opaque and can be costly, plus people are reluctant to lose control of their money as well as the potential upside of market gains. Target date funds, for example, are much simpler, and though they differ depending on glide paths, they are much easier to understand. There are so many different types of annuities it literally makes my head hurt.

There is good reason for the many variants of annuities because as people get older, their needs diverge. To select the right one requires participant engagement, a rare commodity in the DC world. Initial results trying to reach participants, according to Dr. Benartzi, are encouraging as people approach retirement.

But even if we can get engagement, we then need to assign each person the right type of annuity. Robert Toth, an attorney, has done a good job simply explaining to the uninitiated like me about the differences, noting in part, “‘accumulating decumulation’ rights is very much different than merely accumulating investment assets under a plan. This is so very opposite to the mutual fund, daily trading world to which participants have become accustomed.”  

So let’s assume we can assign people the optimal guaranteed income vehicle based on their goals, health and family or personal situation. And prices can be very competitive because plans either on their own or through their record-keeper or advisor get volume discounts. Though SECURE 1.0 took some due diligence risk off the table for plan fiduciaries, there is still the issue of transferability when a plan or participant switches record-keepers.

There is hope as Fidelity, Alight and Vanguard, in collaboration with the Retirement Clearinghouse, recently created a data exchange called the Portability Services Network with four other top-10 record-keepers expected to join imminently to deal with smaller account transfers and leakage. This network could help with retirement income transferability, but it may be a while before they can get to it as they need to focus on their core mission.

And as RPAs look for additional revenue, they may be tempted to co-create or partner with retirement income providers, which may mean potential conflicts of interest like the ones being litigated in the Wood case against NFP and flexPath. Who is watching the watchers as we know that plan sponsors and participants will need a lot of guidance?

Will guaranteed income really take hold in DC plans, which is an obvious way to help those without access to a personal financial advisor? One provider told me that a good number of plans have adopted their solution, but the assets are still minimal. Should we embed guaranteed income into target date funds, which will ignore the differences of the various investors? Are managed accounts, which are more personalized, a better vehicle? If the guaranteed income is not part of the default option, their use will mirror the uptake of managed accounts.

Many questions and more answers than we have ever had as well as demand. Very interested to hear what the leaders have to say at this week’s Retirement Income Roundtable and Think Tank, which will be reported next week.

Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.

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