Commentary: Now, more than ever, the retirement plan services industry is placing a greater emphasis on in-plan guaranteed income solutions to help employees achieve a better retirement outcome.
Approximately 22,000 retirement plans now offer guaranteed income solutions, with assets close to $3 billion in market value invested in these products. The number of plans offering guarantees has grown by 53% over the past two years and the assets in these vehicles have risen 62% over the same time period, according to data from LIMRA.
In-plan guarantees may continue to rise in popularity with recent and upcoming government regulations that may act as a catalyst to the adoption of in-plan guaranteed income solutions. IRS Notice 2014-66 and the Treasury QLAC final regulations are examples of favorable regulations that have already passed. The DOL Conflict of Interest regulation, along with new Annuity Safe Harbor regulations, may also provide additional guidance to plan providers and sponsors that promotes the use of retirement income solutions.
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Benefit administrators may also look to in-plan income investment options as a workforce management tool. In-plan guarantees may: (1) help employees achieve guaranteed lifetime income, (2) protect assets against market declines, (3) hedge inflation risk, and (4) help employees retire comfortably at an expected age. By reaching a higher state of retirement readiness, older workers are able to retire on time, saving the employer money as older workers generally earn more than younger employees and certain benefits such as health insurance and disability insurance are also more expensive for older workers.
Understanding GMWBs
Guaranteed minimum withdrawal benefits are by far the most prevalent innovative solution in the market today, with adoption outpacing fixed annuity solutions. A GMWB feature of a retirement plan contract may provide guaranteed lifetime income, downside market protection, a hedge against inflation and access to the market value in the investment option. A plan participant may receive these benefits by investing in a balanced fund or a target-date fund that has a GMWB associated with that investment option. Here are four things plan sponsors should know about GMWBs:
1. Protection from market declines with participation in rising markets. To help protect a plan participants savings, their investment has an income or benefit base (income base), depending on the specific GMWB product that is used to calculate the guaranteed lifetime retirement income. The income base is reset annually and equals the higher of either the market value of the participants account invested in the balanced fund with the GMWB feature, or the participants previous years income base plus retirement plan contributions, minus withdrawals. The income base gives savers a level of protection against market declines while still providing a way to participate in rising markets. The income base is not available to participants as a lump sum withdrawal, but rather as the amount upon which their annual income is calculated.
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2. Guaranteed income for life. At retirement, plan participants can keep savings in their plan subject to plan terms or roll over savings to an Individual Retirement Account and begin receiving guaranteed income for life. The amount withdrawn is based on the guaranteed annual income rate. For example, a typical GMWB for someone age 65 is 5% of their income base per year.
3. Full account access. If plan participants are eligible to take a distribution from their account, they always have full access to their account balance if needed while saving for retirement and after retirement. However, any early withdrawal or excess withdrawals over the guaranteed annual income amount from the GMWB option will reduce the guaranteed annual income and income/benefit base.
4. The income base benefit. Many investments fluctuate in value. For example, assume a plan participant retires at age 65 with a $500,000 account balance in stocks and bonds. In the three following years, assume there are significant market declines, such that by the end of three years, that account balance has been cut in half, to $250,000. Even if the participant is disciplined in taking withdrawals at a fixed percentage of their original account balance for example, 5% of their account balance or $25,000 per year they may run out of savings in 15 to 20 years.
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If the same saver had a $500,000 income base in a GMWB option, despite any market downturn, their income base would remain at $500,000. Their income base could increase if, or when, the market turned around, if the subsequent market gains take the market value to more than $500,000. They would also receive guaranteed annual income for life, reducing their worry about depleting savings before their retirement years are over.
Applications for workforce management
Retirement income solutions may help employers maintain, recruit and manage talent in their workforce and provide a unique benefit that may enhance their total rewards offering. With market declines and financial uncertainty, todays older workers may be tempted to delay retirement or work well past traditional retirement age. Retirement income solutions may be an effective tool for employers to give their long-tenured employees the confidence they may need to make the transition into retirement.
Retirement income solutions may provide seasoned employees with the motivation to be productive while looking forward to an expected retirement date and retirement income that wont be outlived. Younger employees may also have additional growth opportunities for career development as older and more advanced workers transition out of the workforce. In-plan guarantee options may be less expensive than certain individual income options purchased in the retail market, which can be an attractive tool for recruiting top talent.
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In-plan guaranteed income solutions may provide a number of benefits to both plan sponsors and participants. Downside protection helps give participants the confidence they need to stay the course and remain invested in their plan during market volatility. By insuring their retirement balance against a down market, participants may be able to maintain a more appropriate level of equity exposure in their asset allocation. These products may not be suitable for every plan and investor, though, and plan sponsors and benefit administrators should evaluate their plan goals to determine the solution that makes the most sense for their organization and employee base.
Bob Melia is vice president of product development, product and solutions management retirement plan services, at
