Much more than meeting their responsibilities as a fiduciary, not-for-profit plan sponsors are concerned that employees will delay retirement because they do not have enough money and that they will run out of money in retirement, TIAA reported Wednesday.
TIAA based its report on a survey conducted by KRC Research via phone among 835 plan sponsors in the not-for-profit sector from mid-January to mid-February.
Thirty-eight percent of respondents said meeting their fiduciary responsibilities was their top concern, while 31% cited the Labor Department’s fiduciary rule (delayed for 60 days earlier this month) and 24% criticism about administrative and investment fees.
Topping those concerns were worries about employees’ readiness for retirement. Sixty-four percent of plan sponsors were concerned about participants delaying retirement for lack of enough money, and 59% worried that their employees would run short of money in retirement.
These worries are not unfounded. Recent research showed that Americans are not very confident about the state of their financial readiness for retirement.
Income for Life
The survey highlighted changes that could help increase employees’ retirement preparedness and ease employers’ concerns. Fifty-four percent of not-for-profit plan sponsors said they offered a plan with a guaranteed lifetime income option, and 87% of those said they would keep it.
Of sponsors that do not provide a lifetime income option in their plan, 34% said participants could access annuities outside of the plan, and 21% believed fees were too high.
TIAA countered that these responses reflected common myths about annuities. It said lifetime income options offered through a workplace retirement plan can offer benefits that employees may not find through retail financial solutions—and most often with lower fees.
“With many people living 20 years or more in retirement, a successful retirement strategy may benefit from a source of income for life,” TIAA’s chief executive of institutional financial services Ron Pressman said in a statement.
“And we’ve seen that employees who contribute to an annuity through their retirement plan over time can generate more retirement income than those who simply purchase one upon retiring.”
TIAA also said plan sponsors’ expectations for how employees will draw down their savings may need rethinking. Thirty-five percent of survey respondents said they expected their employees to generate retirement income only through systematic withdrawals.
It pointed out that although taking steady withdrawals could be part of a larger retirement income strategy, relying on this method risked outliving one’s savings.
In addition, it said, plan sponsors may be overlooking a critical feature for employees who do not think they have enough knowledge or interest to choose investments on their own.
Only 48% of sponsors had a designated default investment option, which can provide unengaged employees with a convenient way to invest for retirement.
TIAA said plan sponsors could consider making an investment with a lifetime income option their plan’s default option, but 56% of those surveyed were uncertain whether they would adopt such an option.
They could be overlooking the fact that default investment options offering an income for life feature are designed specifically to help improve retirement outcomes.
TIAA said this was especially important given that 35% of individuals in its 2016 Lifetime Income Survey who held target-date funds (the most common default option) expected them to guarantee a monthly income check for the length of their retirement.