Many DC Plan Sponsors Hesitate to Offer Lifetime Income Products

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Insurance-backed products are among the solutions for helping retirement plan participants attain a steady flow of income during retirement, but many plan sponsors are reluctant to offer them, a survey found.

Sponsors’ reluctance to embrace lifetime income solutions can be traced to concerns with fiduciary risk, the cost of the products and their relative newness, according to results of the Lifetime Income Solutions Survey by Willis Towers Watson released on July 28.

Nearly three-quarters (71 percent) of respondents said the primary reason to adopt a lifetime income solution is to help participants convert defined contribution plan balances into lifetime income, the survey said.

Many plan sponsors tend to opt for safer choices to help participants deal with the risk that they will outlive their money, such as systematic withdrawals during retirement, income planning tools and education, the survey said. Just 19 percent offer out-of-plan annuities at the time of retirement, it said.

“The most effective way to deal with longevity risk is through some kind of insurance product, though some plan sponsors are reluctant to use them,“ Bill Dewalt, senior investment consultant at Willis Towers Watson, told Bloomberg BNA on Aug. 9.

Fiduciary Risk

Fiduciary risk was the most often cited reason for not adopting a lifetime income solution, with 81 percent of plan sponsors saying it was a very or extremely important barrier to doing so, the survey said.

Plan sponsors understand their fiduciary responsibility as to investment manager selection and investment options, Dewalt said. However, “insurance, as something that is maybe going to involve a multi-decade time horizon for the participant, and is not easily changed once they accrue a benefit, starts to raise different concerns,” he said.

While a 2008 Department of Labor regulation, DOL Reg. § 2550.404a-4, provided guidance on a safe harbor for the selection of annuity providers for defined contribution plans, “many plan sponsors still have concerns and reservations in terms of what do they actually need to do to show that they have satisfied all elements of the safe harbor,” Dewalt said.

About two thirds, or 67 percent, of plan sponsors not offering lifetime income products said that their cost was a very or extremely important barrier, and 60 percent said that the market offerings and products were not satisfactory or were too new, the survey said.

The absence of price competition for insurance products makes it difficult for plan sponsors to bid the product competitively, Dewalt said. “So they may seem expensive, making it hard to judge if the cost is appropriate for the longevity risk-hedging you are getting,” he said.

“The best a plan sponsor can do is to get multiple quotes for an annuity product and choose the best quote,” he said.

What some plan sponsors consider an “unsatisfactory” product is really a product that is very new and has little track record or adoption by other plan sponsors; or they are too complex for plan sponsors to understand, he said.

The experience of plan recordkeepers might give plan sponsors some additional comfort level in offering insurance-backed solutions, since many of them offer some subset of these products, Dewalt said.

“Plan sponsors should be pressing their recordkeepers, plan providers and insurers to reduce the cost and the complexity of these products and make the fiduciary risk more transparent,” he said.

Survey results were based on responses from 196 large and midsize U.S. employers that sponsor a retirement plan.

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