Retirement Plans and Retirement Income: It’s Complicated

Retirement

Nevin E. Adams, JD
9/13/16

A new plan sponsor survey offers insights into the issues regarding retirement income adoption by workplace retirement plans. More than a third of 212 plan sponsor respondents (37%) agree that solvency determination (i.e., evaluation of the annuity provider to ensure that its solvency is adequate to make all future payments to the annuitants(s)) is the most pressing issue that still needs to be addressed to ensure a workable safe harbor. According to MetLife’s 2016 Lifetime Income Poll, this rises to 47% among those who are extremely or very familiar with the proposed amendments to the safe harbor.

Three-quarters (76%) of respondents say that in determining the adequacy of the solvency of a potential annuity provider for their DC plan, they would prefer to be permitted to rely on certifications from the annuity provider based on the regulatory process carried out by a state insurance commissioner, rather than to conduct the solvency due diligence process themselves as part of their regular due diligence process for plan providers.

A Safer Harbor?
Nine in 10 plan sponsors (92%) agree that it is important for the DOL to provide a workable safe harbor for annuity carrier selection criteria for individual account qualified plans in order to make it easier for plan sponsors to include income annuities in their DC plans, including 70% of plan sponsors who think it is extremely or very important. This percentage rises to 96% among those who say they are at least somewhat familiar with proposed amendments to the annuity safe harbor carrier solvency determination requirement, primarily focused on the condition of the safe harbor relating to the ability of the annuity provider to make all future payments under the annuity contract.

Plan Designs
Though today fewer than 1 in 10 plan sponsors say that their 401(k) plan includes a guaranteed lifetime income option, nearly two-thirds of plan sponsors whose plans do not currently include such an option (66%) say that they would be at least somewhat likely to make income annuities available to their DC plan participants for their retirement when the DOL completes work on an updated safe harbor rule for the selection of an annuity provider. To encourage more widespread adoption of income annuities, nearly 8 in 10 plan sponsors (79%) think that allowing plan participants to take a partial lump sum and a partial annuity from a DC plan is preferable to a plan design where participants must take their entire account balance as either a lump sum or an annuity. The percentage of respondents who agreed with this particular point was slightly higher among respondents with a DB plan, at 81%, compared to 68% who do not have a DB plan. With the DOL reportedly close to finalizing rules proposed in 2012 that would make it easier for sponsors to offer partial annuitization in defined benefit (DB) plans, this finding bodes well for adoption of this feature in DC plans as well.

Regulatory Recall
When looking at the specific regulatory actions that have already been implemented, plan sponsors have the highest level of familiarity with IRS Notice 2014-66, authorizing deferred annuities to be included in qualified default investment alternative (QDIA) target date funds. Seven in 10 plan sponsors (71%) are at least somewhat familiar with the final regulation. The report authors say it is likely that this particular regulation received the highest level of familiarity among all of those related to lifetime income because it involves broader plan investments – in this case TDFs – and because it was actionable. They also note that DC plan sponsors tend to have a very high level of familiarity with investment-related concepts, as opposed to those having to do with guaranteed retirement income. Six in 10 plan sponsors also have familiarity with several other recent final regulations. Notably, 62% of plan sponsors are at least somewhat familiar with DOL Field Assistance Bulletin (FAB) 2015-02, issued in July 2015, providing guidance and direction on selection and monitoring for annuities in DC plans. Additionally, 59% of plan sponsors are at least somewhat familiar with the final rule issued by the IRS and Treasury Department in July 2014 authorizing qualifying longevity annuity contracts (QLACs) for DC plans and IRAs. Rounding out this middle group, 57% of plan sponsors are at least somewhat familiar with IRS Revenue Ruling 2012-3, issued in February 2012, which provided clarification and instructions for handling spousal consent for deferred annuity contracts in DC plans.

Over one-half of plan sponsors (53%) familiar with the final QLAC rule said they would be likely to offer a QLAC to their DC plan participants at some point in the next five years. The smallest plans (under $100 million in plan assets) are even more likely to say they would offer a QLAC in the next five years (91%). The next most likely group to offer QLACs in the next five years are plans with $500 million to $1 billion in assets (65%). When it comes to the largest plans, 44% of those with assets over $1 billion would be likely to offer a QLAC in the next five years. This is not surprising, since larger DC plan sponsors tend to take longer to implement plan design changes, and they tend to be more cautious from a fiduciary standpoint. Among recent lifetime income final regulations, plan sponsors have the lowest level of familiarity with IRS Revenue Ruling 2012-4, issued in February 2012, which allows a rollover of lump sum payouts from a DC plan to a DB plan with the same employer to take advantage of the DB plan’s annuity form of payment. Just over half of plan sponsors (53%) have any level of familiarity with the final regulation. The number of those extremely or very familiar with this particular Revenue Ruling was much higher, as would be expected, among plan sponsors who have DB plans, than among sponsors with no DB plan. Over a quarter (27%) of those with DB plans reported being extremely or very familiar, compared to just 16% of those without DB plans.

Helpful ‘Hints’
Not surprisingly, 96% of respondents agreed that it would be helpful if DC plan account balances were required to be communicated as lifetime income – in addition to the total account balance – on benefit statements. Most (90%) believe that it is in the best interests of plan participants to keep plan design changes simple, since complexity, such as too many choices and features, often leads to participant inertia. More than half (58%) of plan sponsors do not believe that withdrawal solutions with minimum guarantees are easy to understand for the average DC plan participant. However, the most striking finding – at least within the limited sampling provided in the survey – is that a large majority of plan sponsors (85%) agree that the core purpose of a DC plan should be to serve as an income source during retirement. That’s considerably higher than the 9% of plan sponsors in a 2012 MetLife study who believed that the primary focus of their DC plan was to provide retirement income, as opposed to retirement savings. MetLife’s 2016 Lifetime Income Poll was fielded May 17-23, 2016. MetLife commissioned MMR Research Associates, Inc. to conduct the online survey in cooperation with Asset International, Inc. There were 212 DC plan sponsors who participated in the survey from among the Fortune 1000 companies, as well as the next largest 2,000 companies by DC plan asset size.

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