By all accounts, the 401(k) and defined contributions are a huge success moving in the right direction with higher account balances, contribution rates, and impending increased coverage through state and federal mandates.
On the other hand, these payroll-cutting, participant-directed plans are a surprise failure, leaving people with a bigger problem to deal with than simply accumulating retirement assets. It’s like we offer a guided tour to an ideal travel destination and, halfway through the flight, professional pilots parachute the passengers, leaving the passengers to land themselves.
The answer is quite clear, as there is demand – in-plan retirement or guaranteed income. But what are the obstacles and how do we overcome them?
“When asked if they want guaranteed income to replace their paychecks, most people respond positively,” said Mike DeFeo, head of DC distribution at Alliance Life Financial. “But when asked if they want to invest in annuities, the results are very different.” Michelle Richter, executive director of the Institutional Retirement Income Council and principal of Fiduciary Insurance Services, agrees. “65% of consumers desire the features of an annuity.”
This is because many retired DC participants fall prey to unscrupulous brokers who dominate selling annuities in the K-12 non-IRISA market. “Plan sponsors are concerned about the high fees and lack of flexibility with annuities,” said Matthew Walniewicz, President of Income America. Both these concerns are prompting plan sponsors to consider in-plan retirement income, while also muting demand when annuities are offered as a solution.
“The combination of less defined benefit plans, a lack of Social Security benefits and longevity inflation is driving the demand for guaranteed income,” says John Faustino, head of Broadridge company Fi360. “The lack of a standardized due diligence process such as technology to allow mutual funds, portability and regulatory guidance is not helping.”
So if the demand for guaranteed income and paycheck replacements is so high, what are the barriers and solutions? We’ve used the workplace effectively to help people save – Fidelity notes that IRAs and 401(k)s contribute as millionaires increase more than 30% in Q4 2021 Why don’t plans offer retirement income?
Like all new features in DC plans, agreement is required by three unrelated parties – the plan sponsor, the consultant and the record-keeper. It is difficult for three parties to agree on anything. “Insurance and retirement providers have traditionally been technology challenged,” says Michelle Richter. “We need middleware to help them talk to each other.”
Although Allianz is working with smaller providers through Relius, a popular record keeper software platform, the industry needs the Fab 5 to drive more adoption of retirement income products. “While insurance providers may be reluctant to offer the services of other companies and keep records,” commented Matthew Eckman, national practice leader at Prime Capital Investments, “like other investments, they need to open up their platforms to those products. which are portable, become competitive.”
Retirement income is the kind of target date investment where more than one may not be necessary, so those providers with proprietary products tend to offer other providers’ products or spend money to upgrade technology for record-keeping or privilege. It would be difficult to persuade.
Plan sponsors must be convinced to allow participants to remain in the plan when terminated, but their willingness is increasing as their planning and investment fees decrease with more assets and third parties trying to keep track of terminated employees. are available for
The key is RPAs who need to advocate on behalf of their clients so that their record keeper partners can offer in-plan guaranteed income. “Consultants are prepared to offer products unless they are experts,” says Mike DeFeo. According to Matthew Eckman, “RPA does not want to recommend a product that is not widely available.”
“The SECURE Act should have done for retirement income what the Pension Protection Act of 2006 did for target date funds,” says Matthew Wollniewicz. “But we have so far missed the boat because of Covid.”
Along with the SECURE Act, a recently proposed bill to allow retirement income in the form of QDIA, the Labor Department’s guidance encourages access to lifetime income, shows lawmakers are sympathetic. But education is especially necessary for RPAs who are not accustomed to selling annuities, as is technology that allows transferability of products.
Like any new service, everyone must win. It will not happen just because it is supposed to be unless the government forces the issue. In the war for talent, retirement income can be used to attract and retain employees. RPA needs to offer more than just fees, funds and fiduciary services, and even more than auto-plans, all of which can be provided by dabblers wishing to deduct fees.
Record keepers on these new products must pay to justify the expense of upgrading the technology to service non-proprietary products. Equally important, large RPA firms and plan sponsors should push for in-plan guaranteed income that is cost-effective, flexible and transferable, or move their business elsewhere. Thus new products are introduced into the DC system.
