Retirement Income: A Roadmap for Plan Sponsors

For years, employers have poured resources into helping employees save for retirement via workplace savings programs. They have spent far less time, energy and money helping workers figure out how to prudently spend down their savings once they’ve left the workforce. Now, that’s changing.

With the baby boomer generation retiring in droves, providing drawdown options for retirement plan participants is becoming a bigger imperative for employers. That’s especially true for those who want to keep retirees, and their retirement savings, in their workplace retirement plans. After all, retirees typically have the highest account balances, and their funds help retirement plans preserve their scale and hence their bargaining power with providers. Allowing retirees to stay in their workplace plan also can help employers with workforce management if it gives employees the confidence they need to retire when they want.

“If you’re going to adopt a policy of seeking to retain those retiree assets, you really want to buy into a philosophy that providing retirement income solutions is important,” said Greg Ungerman, senior vice president and defined contribution practice leader at institutional investment consulting firm Callan LLC, at the 2019 SVIA Fall Forum. Otherwise, he explained, many retirees won’t have the tools they need to achieve retirement success.

For plan sponsors who want to keep retirees in their plans, Ungerman outlined three steps to providing them with retirement income options they need. The first is to review the distribution options already available within the plan. Then, if there are gaps, fill them. Finally, engage in targeted, consistent communications with retirees and near-retirees about the plan’s ability to facilitate distributions.

Crucially, all of these measures will require close coordination with plan recordkeepers, some of whom are better equipped than others to handle a diverse range of distribution options. Ungerman pointed to a recent Callan survey of 23 recordkeepers, for example, which found that while all support periodic distributions and installment payouts, seven charge fees for distributions—a negative for retirees.

“We don’t charge biweekly fees on money coming into a 401(k) plan,” Ungerman said. “Why should we do that on the way out? That’s a topical conversation plan sponsors can have with their recordkeepers.”

Ungerman also noted that 13 of the surveyed recordkeepers do not allow participants to specify a source of funding for either partial or installment distributions. That’s also a potential negative for plan participants. A retiree who wanted to take all their distributions from, say, a stable value fund, for example, would be forced instead to withdraw their funds pro-rata across all the investment options they were using.

Ungerman noted that many defined contribution plans already offer participants some investment options that can be useful in retirement, such as income-oriented target date funds, managed accounts with drawdown functionality, and, for those who really want to preserve their hard-earned capital, stable value funds.

For plans looking to create a “clean sheet” investment structure for the distribution phase of retirement, Ungerman suggested a three-tier approach. The first tier of distribution options would include a target date retirement income fund and managed accounts with drawdown functionality. The second tier would offer a stable value product. The third tier could include a range of specialty options, such as in-plan annuities, investment products with guaranteed minimum withdrawal benefits, access to an annuity placement service that could steer plan participants to an appropriate annuity outside their plan, and qualified longevity annuity contracts (QLACs).

Making sure plan participants know about their distribution options, and how to use them, will be critical, Ungerman said, especially for participants who aren’t naturally inquisitive about, or adept navigating, money matters. “If it doesn’t translate to the participant and they’re not using it correctly, you’d have to ask if all the work was worth it,” he concluded.