A growing number of defined contribution plans are either offering investment options to provide lifetime income in retirement or are considering doing so, according to a new survey from Willis Towers Watson, a retirement consulting firm.
Of the 164 DC plan sponsors surveyed, 30% offer lifetime income solutions, up from 23% in a 2016 survey, and almost 40% of them offer insurance based products such as annuities — primarily immediate or deferred income annuities — or investment solutions that include a variable annuity component.
In addition, 41% of DC plans that offer lifetime income solutions are looking to expand those options, up from 33% in 2016. Sixty percent of plans who have not adopted lifetime income solutions indicated they may do so in the future.
Their reluctance to offer such solutions reflect concerns about administrative and product complexity, high fees, portability restrictions, insufficient transparency, lack of demand by plan participants and fiduciary risk.
The survey defines lifetime income solutions broadly, including education and planning tools, systematic withdrawals during retirement and guaranteed income products.
“It’s becoming more evident to employers that their workforce is aging and many are not financially ready to retire,” says Dana Hildebrandt, director of investments and head of lifetime income solutions at Willis Towers Watson. “What does that mean for productivity in their workforce? For workers being engaged? The defined benefit system was a good natural attribution machine but that’s gone.”
One solution for employers concerned about their workers’ retirement security would be to bring back DB plans, but that is unlikely. High costs have led many DB plans to be closed off to new employees.
That switch from DB to DC plans has led to employers’ concern about the retirement readiness of their workers, says Hildebrandt. A Federal Reserve survey of over 11,000 adults age 18 or older conducted last year found that one-quarter have no retirement savings or pension. A Government Accountability Office study, based on 2016 data but released earlier this year, found that almost half of U.S. households headed by an adult 55 or older had no retirement savings.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which passed overwhelmingly in the House in June but remains stalled in the Senate, would make it easier for retirement plans to offer annuity options. Among its many provisions are a new fiduciary safe harbor for plan sponsors choosing an annuity provider and portability of those annuities when participants change jobs.
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