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More Income Annuity Options Needed in DC Plans, Sponsors Request Support

There has been quite a shift in thinking by defined contribution plan sponsors in regards to what the main goal of their plans really is. Defined contribution plans were originally designed for employees to save for retirement and the goal really was who could save the most in their working years and have the highest balance upon retirement. But now, plan sponsors have shifted the goals for their retirement plan participants. The goal has shifted to creating income rather than just building savings. In the Business Wire press release, “Most Plan Sponsors Agree Core Purpose of DC Plans is to Provide Income During Retirement,” MetLife summarized the results of a recent study performed on plan sponsors.

MetLife’s 2016 Lifetime Income Poll found that 85% of plan sponsors think that the main job of a defined contribution plan should be to provide income during retirement. This was a change from the last study performed four years ago. But plan sponsors also are quick to point out that they need regulatory help to make it easier to offer lifetime income options within their defined contribution plans. The study also researched how familiar plan sponsors are with the Treasury and Labor Departments’ recent regulations aimed at helping Americans better prepare for retirement. Most plan sponsors are well aware of the government’s work to increase the amount of people who have guaranteed income during their retirement; a full 94% reported that they were.

One MetLife executive said that income must be the top priority for DC plan sponsors now, not retirement savings. The majority of these sponsors are ready to provide the tools, education and plan options to help participants create an income stream. But they are adamant that they need more help in the regulatory department to make it easier to offer plans focused on lifetime income rather than cumulative savings. There are two things that more than 90% of plan sponsors are requesting. The first is a requirement for statements to list the lifetime income in addition to the total account balance and the second is a safe harbor for the annuity selection. Sponsors say that a safe harbor would better allow them to include income annuities in their plans. Three-quarters of them want to be able to use the state insurance commissioner’s annuity certification rather than perform the certification process themselves.

Currently, there is only a lifetime income option offered in 6% of defined contribution plans. Six percent! If the Department of Labor updates the safe harbor rule like plan sponsors are calling for, that number will likely skyrocket. Well over half of the plans who don’t currently offer a lifetime income option say that they will probably add an income annuity option to their plan if the safe harbor rule changes. Plan sponsors also want the options to be simple because the more complex the choices, the more they are ignored by participants. A full 90% of sponsors say that any plan changes should be simple in order to best benefit participants. Immediate income annuities and QLAC’s are two products that help participants create a reliable income stream from their savings. Close to 80% of plan sponsors think it is in the best interest of participants to allow them to take a partial annuity and a partial lump sum rather than to force them to do all or nothing with their savings. Defined contribution plan sponsors would like to offer more income annuity options in their plans, but they are requesting more regulatory support to do so.

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