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Next Phase for 401(k)s? Retirement Income

Lee Barney from PlanSponsors.com, recently reported on an article in The Cerulli Edge –
U.S. Asset and Wealth Management edition that Cerulli’s expectation is that the next major
development in the retirement planning industry will be plans embracing retirement
income now that millions of Baby Boomers are retiring.

The article cited, “The Pension Protection Act of 2006 (PPA) resulted in massive reform of
the retirement planning industry, permitting a safe harbor for plan sponsors to
automatically enroll participants into their defined contribution (DC) plan—specifically into
a qualified default investment alternative (QDIA) such as a target-date fund (TDF).”

Bing Waldert, a managing director with Cerulli Associates, stated, “Retirement market
service providers should educate plan sponsors on the role of secure income in their
participants’ retirement planning. This means making the DC platform more suitable for
income, both from a flexibility and product standpoint. We are seeing a DC industry in which
plan sponsors and consultants are taking a degree of control away from the participant, with
the intention of guiding plan participants to better decisions about retirement savings… As
part of this continued innovation, converting the 401(k) plan to an income platform is a step in
taking DB [defined benefit] market experience and applying it to the 401(k) market.”

Cerulli makes the following points:

  • Step one: encourage plan sponsors to work at keeping retired participants in their plan, to “embrace a more holistic view toward their participants.”
  • Step two: work with plan recordkeepers to permit retired participants to take systematic withdrawals from their savings.
    • They reported that 87% of Vanguard plans allow investors only one-time,
      lump-sum withdrawals. “Structurally,” says Cerulli, “this is a simple
      fix…Consultants, recordkeepers and asset managers can work with plan
      sponsors to redesign the plan to offer a broader set of distribution options,
      including partial withdrawals or regular, systematic payments.”
  • Step three: offer TDFs that include retirement income options.
    • “More than one-quarter (27%) of asset managers classify a managed
      payout as an attribute highly likely to be included in the next generation of
      target-date products… In addition, sponsors might turn to “managed payout
      funds [that] aim to provide steady retirement income to plan participants
      by achieving specific annual payout targets,”

  • Another option would be offering annuities in 401(k) plans, but the Department of Labor (DOL) will need to offer plan sponsors a safe harbor for the selection of an annuity provider before this is probable. The Increasing Access to Retirement Security Act of 2017, introduced by the House, would clarify rules that provide a fiduciary safe harbor when selecting an annuity provider.