In-plan retirement income – considerations for plan sponsors

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The defined contribution (DC) plan industry has historically been primarily focused on the accumulation phase of retirement. In the SECURE Act of 2019, Congress brought into focus the decumulation phase by creating a safe harbor framework for guiding plan sponsors in their potential assessment of guaranteed in-plan retirement income options. Guaranteed in-plan retirement income (referred to throughout this article simply as in-plan retirement income) is a broad label for a set of products that seek to allow participants to generate a stream of income from all or a portion of their plan account balances that will last them through their entire retirement. While there is a broad spectrum of products, a commonality is that they rely on insurance company guarantees and that they are generally complex, hence the need for clear guidance on what will protect plan fiduciaries in the event they would want to introduce these options.

The SECURE Act did not spark an immediate mass adoption of these products. In the five years since the passage of the Act, they are not exactly widely utilized in 401(k) plans. However, there has been a proliferation of these products and some reports of increasing interest among plan sponsors and participants.

Current usage of in-plan retirement income products

Currently, it is estimated that only about 10% of plans have made an in-plan retirement income product available to participants.¹ This may be a result of caution among plan sponsors. A survey published by Greenwald Research in early 2024 found that plan sponsors have expressed a variety of concerns related to offering in-plan retirement income products²:

• Almost 60% of plan sponsors worry these options are too complicated
• Roughly one-third expressed concerns over potential fees
• Roughly one-third expressed concerns regarding increased administrative work related to the products

This being said, the same survey cited high participant interest in these products. Moreover, in a report published by PGIM Asset Management in Q2 2023, many plan sponsors surveyed are at least beginning to think about in-plan retirement income, with reportedly 34% in the basic education phase.³

Plan sponsors should not feel behind the curve or under pressure if they have not yet implemented one of these options for their plan. It is an important decision that requires education on the product types, due diligence and an assessment of plan needs. It is a reality that ultimately, many plan sponsors will determine that this is not a suitable product type for their specific plan. However, having a reasonable understanding of in-plan retirement income and a process in place to assess these products as they become available will be prudent.

The SECURE Act of 2019 Safe Harbor Provisions

Given their complexity and the hesitancy expressed by plan sponsors in adding retirement income solutions, it was an important step when Congress implemented safe harbor provisions for these products in the original SECURE Act. At a basic level, the safe harbor provisions are generally qualitative and focus mainly on assessing the financial soundness of the insurance companies backing any guarantees. At a high level, the provisions include⁴:

• Obtaining written representations from the insurer backing the guarantees that it:

1) is licensed to offer a guaranteed income contract

2) has not had its license suspended or revoked at any time in the last seven years

3) files required audited financial statements

4) has required reserves

5) undergoes a regular financial exam by appropriate authorities at least every five years

6) will notify the plan sponsor if any of these conditions change

• Reviewing the above representations on a regular basis and obtaining written representation of the above on at least an annual basis⁵

These safe harbor provisions are not a requirement for all plans, but are in place for plan sponsors that introduce an in-plan income product backed by an insurance guarantee. Employers that comply with this safe harbor are protected from fiduciary liability with respect to participant losses in the event the insurance company is unable to pay guaranteed benefits. However, the named fiduciaries of a plan are still liable for meeting their other fiduciary responsibilities, such as evaluating fees associated with such retirement income options.⁶

In-plan retirement income is not a novel concept. For instance, annuities have long been offered as options alongside plan investment menus within 403(b) plans, and guaranteed minimum withdrawal benefit riders and other annuity products have been offered for DC plans record kept under group annuity contracts. However, there has been an evolution in these products since the passage of the SECURE Act. New products coming to market tend to be collaborations between asset managers and insurance companies, whereby an annuity is embedded as part of asset allocation investment solutions. Therefore, beyond the basics of the safe harbor provisions, which are designed primarily to assess the soundness of insurance guarantees, plan sponsors also need to consider the investment merits of these new product types and understand how the insurance component fits into the overall asset allocation. Just like any other investment offered in a plan, a plan sponsor should consider important elements, including:

• Whether the needs of the plan warrant the introduction of such a product in the first place.
  • Consideration should be given to whether the demographics of the plan point to expected usage of the income feature. For example, a plan sponsor may want to run an analysis to determine if there are there a reasonable number of participants that would have a large enough account balance at retirement to allow them to benefit from annuitizing all or a portion of their balances.
  • This is particularly important given that, in many cases, these products may be used as the plan’s default investment option and the embedded income features may have certain costs.

• The structure of the product and its role in the plan’s menu.
  • Many of these products are asset allocation strategies like target date funds and are designed to act as the plan’s qualified default investment alternative (QDIA).
  • Fiduciaries must take into consideration the appropriateness of a potential solution as the QDIA for the plan, assessing the suitability of the asset allocation and the glidepath relative to the plan’s demographics.

• The investment merits of the product, including performance and risk.  
  • Plan sponsors should review the performance and understand the risk/return characteristics of the investment. A potential complication with this analysis is that many of these products are new and lack performance history. However, certain products are designed to be proxies of existing target date or asset allocation funds. In these cases, the funds have the same managers and general overall strategy, and the insurance product is embedded as a component of the fixed income asset allocation. While a lack of track record within this context is not necessarily a non-starter, it does make evaluating them more challenging.
  • Plan sponsors should focus on whether the investment can be effectively monitored over time to ensure that it aligns with the plan’s standards.
  • Plan sponsors also should consider whether the plan can exit the investment without generating an adverse situation for participants. If the investment is not generating adequate risk-adjusted returns for the participants in the plan, this will become an important consideration. 

• The costs associated with the product (both implicit and explicit) and whether they are commensurate with the potential benefits. 
  • Plan sponsors should assess any fees related to insurance riders/guarantees relative to the potential value add of the guarantees.
  • For deferred fixed annuities that utilize guaranteed accounts, the competitiveness of the net crediting rate should be reviewed carefully.
  • The trade-off resulting from the replacement of a portion of the fixed income allocation with the insurance company guaranteed account, and the potential opportunity cost associated with that trade-off should also be considered.

The decision to include an in-plan retirement income option is a fiduciary decision and should not be taken lightly. Prior to selecting an in-plan retirement income product, a plan sponsor should undertake a disciplined process that adheres to the SECURE Act safe harbor provisions and is robust enough to take into consideration all investment elements of the product. This process should be documented and the in-plan income product should be subject to ongoing diligence to determine if it is meeting the needs of plan participants. 

Conclusion

Given the above information, plan sponsors should take a measured approach to in-plan retirement income solutions. As more of these products are made available and interest among plan participants increases, plan sponsors should be prepared to make an assessment that is appropriate for their plan. The decision to offer an in-plan retirement income option is a complex fiduciary decision and should be informed by a consultative, educational conversation with your plan’s trusted advisor. If a plan sponsor decides to incorporate an in-plan income option, this decision should be taken pursuant to a concrete, well documented and ongoing fiduciary process.  

For more information on Retirement Plan Services, please visit our website.

Authored by: Thomas Cooke CFA, Associate Director, Retirement Plan Services, UBS Workplace Wealth Solutions, UBS Financial Services Inc.