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New Products: Adding Income Options to DC Plans

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Defined contribution, or DC, plan sponsors have done a good job getting employees to save for retirement in their 401(k), 403(b) and other plans. Features like auto-enrollment encourage saving and improve the odds that retirees will avoid a funding shortage. DC plans aren’t a retirement-savings panacea, however.

George Castineiras, senior vice president, distribution, Prudential Retirement, notes that savings vehicles like 401(k) accounts were never intended to be a retiree’s primary retirement plan.

“The 401(k) market was never intended to be a retirement plan – it was always a savings supplement,” he says. “And now with the shortcomings of defined benefit plans not being at the funding levels they need to be and Social Security being in question, what’s left is the 401(k). The 401(k) assets will become the predominant vehicle of choice in some way, shape, or form for most participants in the future.”

The ongoing bear market has revealed another problem with relying solely on DC plans.

Plan participants generally are encouraged to invest some portion of their account balances for growth, usually in the form of stock funds. Although long-term investment results favor this approach, non-guaranteed investments expose employees to the sequence-returns risk during the years immediately surrounding their anticipated retirement date.

“People don’t really take the time to think about that when the markets are going well,” shares Castineiras. “Inertia sets in; most people are never prepared for it. You can talk about it until you’re blue in the face. But when it happens, it hits like a brick across your forehead, it gets everyone’s attention, and that’s what’s getting everyone’s attention right now.”

Plus, the decline in traditional defined benefit plan participation exacerbates the problem, since employees without pensions are more reliant on their DC balances, which they must manage to create a retirement-income stream.

Plan sponsors are now beginning to recognize the impact of these problems, and financial-services companies are responding with a new generation of income-solutions embedded in DC plans. Income solutions aren’t new, of course: Plans routinely offer a guaranteed-income annuity option to departing employees, and most employees routinely reject it because they don’t want to surrender control of their funds.

The new generation of DC-plan annuities addresses that problem by giving employees greater control over withdrawals and the ability to pass funds to beneficiaries, in addition to income guarantees.

And although these plans are still relative newcomers to the DC market, they are gaining ground.

Launched in January 2007, Prudential Retirement’s IncomeFlex surpassed $100 million of assets in September 2008. In addition, more than 70 plans are offering clients this product.

As the number of baby boomers reaching retirement increases, participants’ interest in IncomeFlex and its competitors is likely to increase, as well.

To read more about IncomeFlex, go to


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