Expanded Distribution Options Next Step in DC Plan Design, Report Says


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Employers are considering adding distribution options to their defined contribution plans in response to demands from employees for retirement income security, a new report said.

Options such as installment payments, periodic withdrawals or annuity payments could enhance retirement income security more than the all-or-nothing approach of a full withdrawal of amounts from the plan, according to the report by the Institutional Retirement Income Council, a non-profit advisory group for the retirement income planning community.

For many employees, the defined contribution plan is their largest financial asset, and regulators also apparently prefer that retirement assets stay in the qualified plan marketplace, the report said.

The emphasis on distribution options reflects an appreciation of the importance of financial and retirement readiness, said a co-author of the report.

“Financial and retirement readiness are becoming important terms for employers, who also appreciate the correlation between financial wellness and physical wellness,” Robert Melia, vice president, product development, retirement plan services, Lincoln Financial Group, told Bloomberg BNA on Sept. 22.

Plan sponsors also stand to benefit from keeping more of the participants' assets in the plan. "As a general rule, plans with higher asset values and higher average account balances often will receive lower per-participant pricing from their service providers," the report said.

Retirement Income Security

Increasingly, employees look to defined contribution plans to provide them with retirement income security, Melia said. For 88 percent of employees age 50 and above retirement income security has become more important over the past three years, and 61 percent of baby boomers are more anxious about outliving their savings than they are about dying, he said, citing data compiled by Lincoln Financial Group.

Participants want more from their retirement plans, with 89 percent saying they want income-generating options in their employer-sponsored plans; 82 percent would be willing to give up 5 percent or more of their salary if it meant having enough money to live comfortably through retirement.

For employees, “at some point in the future, the defined contribution plan will be evaluated not by ‘what is my balance’, but ‘what is my retirement security and income and will I live comfortably and with dignity throughout my retirement?’” Melia said.

“The biggest risk to participants is if there is a steep drop in the stock market right before or after an employee retires. This is known as sequence-of-return risk,” Melia said. ”Participants who make withdrawals from their savings at retirement and also experience a significant market downturn will likely never recover and are at risk of running out of assets in their elder years.”

Questions and Answers

In a series of questions and answers, the report discussed the issues that employers should consider in deciding whether to add distribution options to the plan. Those options could include installment payments, periodic withdrawals and annuity payments.

One question asked why not let participants just continue to roll over their accounts into an individual retirement account. Many individuals prefer a trusted advisor relationship in managing their retirement assets, the report said. “However, many participants and sponsors do not realize the institutional buying power a retirement plan has with its investment provider and recordkeeper,” it said. While IRA all-in fees can exceed 1 percent of the rollover assets, the fees of large plans that offer investments within their plan are as low as 0.1 percent to 0.2 percent, it said.

Another question asked what additional administrative burdens would be created by adding distribution options to an individually designed plan. “There will be a need to test the administrative capability of the plan to ensure that it can accommodate periodic distributions, whether in the form of installment payments, periodic withdrawals or annuity payments,” the report said.

Another question was whether adding these options would increase the employer’s exposure as a fiduciary to the plan. “When selecting any option in a retirement plan, a sponsor must follow and document a prudent process,” the report said.

In 2008, the Department of Labor issued a safe harbor for plan sponsor selection of annuity providers in defined contribution plans. Plan sponsors would welcome additional safe harbor guidance from the DOL to assuage concerns about taking on additional fiduciary responsibilities through expanded distribution options, Melia said.

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