By Randy Myers
Retirement income is the hot topic in the retirement plan industry right now. Yet interest in products that convert savings to income hasn’t translated into significant adoption rates. Even retirement plan advisors—often early promoters of new options—hesitate to push plan sponsors toward retirement income products.
“Advisors are very interested in retirement income, just like everybody else,” said Will Hansen, chief government affairs officer for the American Retirement Association and executive director of the Plan Sponsor Council of America, speaking at the SVIA Spring Seminar in April. “But particularly for our 3(38) advisors—those who have assumed fiduciary duty status—there are still concerns about cost, compliance and litigation.”
Plan sponsors share these concerns. Hansen cited research from the Plan Sponsor Council of America showing that less than 10% of plan sponsors offer in-plan annuities—a commonly touted retirement income option—with usage levels declining since 2022.
Legislative Outlook: Patience Required
Some industry professionals hope Congress will pass legislation promoting retirement income solutions and addressing liability concerns—perhaps through a “SECURE 3.0” Act following the SECURE 2.0 Act of 2022. Hansen, however, predicted meaningful action is unlikely before 2027 or 2028.
In fact, Hansen and other industry lobbyists prefer that Congress avoid major retirement legislation during the current partisan climate, fearing negative changes could offset positive ones.
“Retirement is a bipartisan issue,” he emphasized. “We are focused on introducing bipartisan bills.”
Hansen noted two pieces of legislation likely to be reintroduced in this Congress and worth watching:
- The bipartisan Lifetime Income for Employees (LIFE) Act, which encourages more use of annuity-type products as qualified default investment alternatives.
- The Automatic IRA Act, which would require most employers with more than 10 employees without retirement plans to automatically enroll employees in some type of plan, even if it’s just an individual retirement account. As previously drafted, the bill also would mandate that most 401(k)-type plans with more than 100 participants permit participants to receive at least half their vested account balance in the form of lifetime income, assuming their total balance exceeded $200,000.
What Plan Sponsors and Advisors Want
Last September, the Plan Sponsor Council of America asked its members which retirement income options they were most interested in pursuing. Target-date funds with a managed payout feature ranked highest (cited by 63.9% of those responding to the poll), followed by systematic withdrawal features (54.2%), annuities as a distribution option (47.2%) and managed accounts with an income planning feature (45.8%). Among the six options presented, in-plan annuities ranked last with 27.8% expressing interest.
Another survey last year by Cerulli Associates asked retirement plan advisors which retirement income products they are most likely to recommend to their clients. A target-date series with a retirement income vintage proved most popular (cited by 43% of respondents, down from 46% in 2023), followed by a target-date series with an embedded annuity (38%, up from 21% a year earlier). Standalone in-plan annuity products were cited by only 7% of the respondents to that survey.
Cerulli also asked advisors which industry developments would most likely increase adoption of retirement income products and solutions. The top three answers, by a significant margin, were “more flexible/improved recordkeeper distribution options” and “improved quality of annuity options available on recordkeeper platforms,” both cited by 48% of respondents, and “improved quality of participant servicing, support and guidance around annuity product usage,” cited by 41%. However, 21% also mentioned “reduced fiduciary risk as a result of favorable litigation/case law outcomes” and “passage of additional federal legislation encouraging the use of retirement income products/solutions within DC plans.”
Ultimately, Hansen said, wider adoption of retirement income products will likely require a two-tier effort, one aimed at enabling legislation and another at convincing retirement plan participants that the products work and that, as Hansen put it, “‘annuity’ is not a dirty word.”
Litigation Risk Remains an Issue
Large plans—defined as those with 5,000 or more participants—are particularly mindful of litigation risk when managing their retirement plans, Hansen reported. Only 6.3% say it has no impact on their decisions. Roughly six in 10 sponsors of all sizes say litigation risk has some impact on plan management.
“I think that is a good reminder for folks pushing certain products that litigation will remain a barrier until we do something about it,” Hansen said.
Stable Value’s Potential Role
Many in the stable value industry believe their product could play a role in generating retirement income. Hansen pointed out that stable value has the benefit of already being widely available. In the Plan Sponsor Council of America’s 2023 annual survey of its membership, 65.2% of plans offered a stable value investment option, up from 57.4% in 2018.
In April of this year, the Council also asked its members which product they consider the best capital preservation option for a retirement savings plan. Stable value was selected by 55.1% of the respondents to the poll, outpacing money market funds (30.4%), short-term bond funds (10.1%) and bond funds (4.3%). Plan sponsors linked their endorsement to an array of benefits embedded in the asset class, including principal protection, low volatility, and steady returns that exceed money market returns over the long term.
