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Fiduciary Links: Plan Sponsor Considerations in Changes in Retirement Plan Income Options

Posted by Kathy Stewart on October 14, 2013

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>>>Plan participant risk can be quantifiable or behavioral, each having separate characteristics but both vital to understand.  A recent report, published by the Society of Actuaries (SOA) and the Stanford Center on Longevity, notes that while quantifiable risks such as outliving retirement savings, market declines, inflation, and fees and expenses pose serious challenges, behavioral risk, including poor understanding, judgment, and decision-making, can be just as problematic.  See “The Next Evolution in Defined Contribution Retirement Plans – A Guide for DC Plan Sponsors To Implementing Retirement Income Programs.” 

The report analyzes information on the importance of offering retirement income solutions, and offers suggestions on how to implement income solutions to offset, and address, risk.  It presents a roadmap for plan sponsors to develop and document a systematic process for designing and implementing a retirement income program. It also provides a checklist for evaluation of retirement income options in their plans and implementation considerations.

Providing retirement income options is one way plan sponsors can help employees address risk.  Sponsors have a choice between three options including: annuitization of a retirement account outside of a plan, establishing an individual annuity distribution option, or a group annuity consisting of investment options that are later annuitized when the participant is ready to take withdrawals. 

With regard to individual annuity distribution options, the Pension Protection Act permits plan sponsors to take advantage of a DOL safe harbor in selection of an annuity provider for distributions from an individual account to meet ERISA requirements. The sponsor has to meet certani requirements, including engaging in an objective and thorough search of annuity providers, supported by a determination of a provider’s ability to make all future payments. Determination of reasonable cost must be met, as well as other issues. 

Investment alternatives introduced as a plan evolves should be individually addressed and explained in a personalized manner to facilitate their effective adoption.  A recently released 2013 survey of 796 plan sponsors of defined contribution plans found that (see page 20) communication of personal­ized information to participants to be most effective in motivating participant behavior in retirement savings as compared to more general education.  However, the study noted that 62% of sponsors deem most of their participant communication as more generalized, compared to 22% of sponsors who viewed information as personalized. 

As sponsors strive to improve plan success in participant-directed plans, such changes in design or alternatives should be weighed, along with the strategy for effective adoption to promote participant understanding and involvement. 

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