U.S. employers that sponsor defined contribution (DC) retirement plans are beginning to embrace lifetime income solutions to help employees improve their financial security in retirement, according to a new Lifetime Income Solutions Survey by Willis Towers Watson, a global advisory, broking and solutions company. Lifetime income solutions include education and the tools necessary to help plan participants determine how to spend down accumulated savings in retirement as well as in-plan and out-of-plan options that create streams of income from employer-sponsored retirement plans.
Interestingly, according to the survey, the majority of employers currently prefer lifetime income education and planning tools, and partial or systematic withdrawals during retirement over more effective solutions such as insurance-backed products, annuities or other managed payout options. The survey also found that roughly one-quarter of employers (23 percent) have adopted one or more of these lifetime income solutions, while another 18 percent will either implement a solution this year or consider solutions for next year and beyond.
“Employees and retirees face major obstacles as they try to save for retirement so that they have a regular, adequate income that secures their future,” said Bill Dewalt, senior investment consultant at Willis Towers Watson. “This is particularly true at a time when employers are increasingly concerned about financial well-being and retirement readiness, and life spans have lengthened and competing financial responsibilities make it hard to save for retirement. Lifetime income solutions allow plan sponsors to continue their mission of preparing employees for life in retirement.”
The most prevalent lifetime income solutions are systematic withdrawals during retirement (73 percent), followed by income planning tools (64 percent) and education (60 percent). The more effective solutions designed to help plan participants develop a steady flow of income in retirement are much less common, even though 71 percent of respondents cited the primary reason for adopting a lifetime income solution was to help participants convert DC plan balances into lifetime income.
The survey found less than one-fifth (19 percent) offer out-of-plan annuities at the time of retirement, although 21 percent are considering these options for 2017. One-third provide in-plan managed account services with a non-guaranteed payout, and 22 percent offer an in-plan asset allocation option with a guaranteed minimum withdrawal or annuity component. Less than one in 10 offer an in-plan deferred annuity investment option.
While many plan sponsors are taking a cautious approach to adopting lifetime income solutions, there is room to grow, as just over half (53 percent) of respondents that haven’t adopted a solution may do so in the future. When asked why they had not adopted a solution, 81 percent cited fiduciary risk as a very or extremely important barrier, while two-thirds cited cost. Six in 10 respondents said the market offerings and products were not satisfactory or were too new.
The survey also found participant usage of lifetime income solutions is low overall. Sixty-one percent reported that a quarter or less of their participants used in-plan managed account services with a non-guaranteed payout service, while just over half reported a similar usage of lifetime income education. Less than a quarter of employees capitalized on lifetime income planning tools, or used partial or systematic withdrawals during retirement at roughly half of the companies.
“Employers are keenly aware of the risk that their employees won’t have enough income to retire comfortably and want to help them build adequate retirement income. Unfortunately, more employers continue to offer solutions that aren’t nearly as effective at minimizing longevity risk, rather than adopting more highly effective solutions — mainly insurance-backed products, annuities and other retirement income-generating options,” said Dewalt.
The survey is based on responses from 196 large and midsize U.S. employers that sponsor a retirement plan. The survey was conducted online in March and April 2016.
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