Today, more than ever, in response to the increased challenges employees face, plan sponsors need to evolve their defined contribution (DC) plans to allow participants to generate guaranteed lifetime income. The following seven best practices can be used as a guide as plan sponsors and consultants consider how retirement plan distribution options can promote successful outcomes for plan participants.
Best Practices Summary:
The best DC plans are simple, streamlined and focus on the goal of providing income in retirement.
1. Keep it simple: For plan sponsors wishing to reframe their DC plan as a retirement income program, it is in the best interests of participants to keep it simple. Experience has shown that complexity in the form of too many choices or features in retirement income products often leads to decision-making paralysis, resulting in participants not taking any action.
2. Opt for a single annuity provider model: Simplifying the annuitization process benefits:
- Participants — Behavioral economics tells us that when people have more choices, they take less action. In our experience, annuity aggregator platforms lead to participant confusion due, in part, to the lack of consistency in terminology, product design and features among annuity providers.
- Plan sponsors — With the SECURE Act, the insurer review process has been simplified, thereby enabling plan sponsors to feel comfortable selecting a single annuity provider without fiduciary concerns.
- Annuity providers — A single provider model allows the annuity provider to devote increased resources and provide consistent messaging in support of the annuity program.
3. Allow for partial annuitization: Plans that allow for partial annuitization address a participant’s need to maximize guaranteed income while addressing liquidity concerns. There is a trend among employers to retain assets in the plan to improve their economies of scale while also helping retirees’ continue to grow their savings once they retire. By enabling some assets to remain in the plan, the participant is not faced with an “all or nothing” annuitization decision.
4. Shift the mindset from savings to income: Remind participants the purpose of their savings is to provide income in retirement. Going forward, when providing retirement savings statement balances, be sure to include the estimated monthly equivalent of lifetime income. Illustrating lifetime income during a participant’s accumulation years, instead of solely at the point of retirement, reinforces the need for saving and helps participants understand how their “pot of gold” translates into a monthly paycheck.
DC plans work best when employees understand that income needs to last a lifetime.
5. Educate participants early and often: If participants don’t understand or use their benefits, they will likely place little value on these benefits or their employers for offering them. Developing a foundational retirement income education program is an action sponsors can take now, well before decisions need to be made by participants about converting their accumulated DC account balances (in part or whole) to a guaranteed income stream.
A retirement income education program can help:
- Reposition the plan from one viewed as an optional savings plan to a core retirement income program
- Increase employee understanding of their income needs and the new risks they will face as they approach retirement
- Encourage participants to use the calculators and modeling tools many sponsors provide
- Enable participants to make more informed decisions for better retirement outcome.
6. Take a multi-channel approach to education: Learning about benefits and making financial decisions vary from person to person and from generation to generation. Everyone has different preferences for how they want to engage and learn about their benefits. A multi- channel approach (such as web, email, webinars, mobile, text, social, print, phone, in-person) to communication and education allows participants to feel most comfortable when receiving information. Check your employee benefit communication results to see what works for your employees.
7. Importance of strong customer support for participants: Experience shows that having strong customer support throughout the purchase journey leads to more successful retirement outcomes. People need support to understand what they are buying and, since these are long- term products, need to be reminded of what they bought.