PLANSPONSOR - August/September 2019 - 57

even equity options can be appropriate
retirement investments, depending on
individuals' post-retirement circumstances, "
notes Kristen Colvin, head
of the defined contribution practice at
consultancy NEPC in Boston. She points
out that, in many cases, target-date funds
(TDFs) have a retirement vintage, with
glide paths engineered for retirement.
Consultants often advocate for
including annuities in DC plans, whether
as an in-plan investment or through a
service outside the plan. Uptake is low,
however. Callan reports that just 12% of
plans offer distributions through annuities
and that other guaranteed options
are in the low single digits. When asked
to explain their lack of interest, sponsors
pointed to discomfort over the fiduciary
implications of annuities, as well as low
demand from participants and difficulty
explaining the complicated products.
How does a sponsor get started on a
complex task such as coaching on retirement
income? " We spend a lot of time
talking to sponsors about the decision
process a committee should go through, "
says Lorie Latham, senior DC strategist
at T. Rowe Price Group in Baltimore. " As
a sponsor, what role do you want in the
retirement journey of your workforce?
Providers have come to realize that they
took products to sponsors before the sponsors
were ready for them, and now we see
them more serious about arranging all
the tools and techniques. "
" We prefer that sponsors offer a separate
retirement income tier, to complement
many plans' tiers of target-date
funds and arrays of passive and active
funds. These can provide flexibility in
retirement income, through several products, "
says Fannin.
Some options would have an income
orientation while still offering some
growth, and sponsors could include guaranteed
income products, whether in the
plan or through a third-party service that
leverages the sponsor's buying power.
" The first step, though, is to see that the
plan design allows partial withdrawals
and understand what the recordkeeper
can accommodate. "
The experience of the last several
years in the DC world of the United
Kingdom highlights the complexity of
the retirement income challenge and
the value of informed guidance. Early
on, most U.K. DC participants had been
required to purchase annuities with
their accumulated retirement assets. In
2015, though, the government relaxed
that rule, letting retirees place their
funds in nonguaranteed drawdown
accounts, equivalent to a managed individual
retirement account (IRA) outside
the plan.
" Since the pension freedoms, we have
seen substantial shifts away from annuities
and toward taking drawdown without
advice, " says the 2018 " Retirement
Outcomes Review, " a report from the
U.K. Financial Conduct Authority (FCA)
covering participants' actions, 2015
through 2017.
" Twice as many [accounts] have
been used for drawdown than to buy an
annuity, " it says. However, that result is
not surprising, as low yields on bonds
translate into poor returns on annuities.
But the FCA came to see that many
drawdown accounts were not invested
productively either: One-third of clients
not seeking advice when setting up their
account were invested wholly in cash.
Worse yet, many of these people were not
clued in: " Our research found that around
one in three consumers who have gone
into drawdown recently are unaware of
where their money was invested. Others
had only a broad idea. "
U.S. sponsors can help their participants
avoid such inefficiency by way of
carefully constructed strategies to leave
their assets in the plan after retirement;
these assets receive the added benefit
of oversight by Employee Retirement
Income Security Act (ERISA) fiduciaries.
" [These participants] know what they want
but struggle with how to get there, " says
Latham. " Sponsors should work toward
bringing the participant base along.
" Once someone hits a certain age,
instead of sending them the paperwork on
how to roll their assets out of the plan, give
them a sheet with the benefits of staying
in-how the size of the plan works to their
advantage, and what fees they will pay in
the plan versus leaving for an outside IRA
account, " Latham continues.
" Also, we should be smarter about
telling participants they can phase and
arrange their retirement investments,
rather than have to make decisions on one
day that are all-or-nothing. " -John Keefe
Proposed Legislation May 'Sell'
Annuities-or Not
YEARS-LONG efforts of the U.S. Congress to broaden and strengthen the American
retirement system may be realized in the current session, through H.R. 1994, known
as the SECURE [Setting Every Community Up for Retirement Enhancement] Act. The
bill passed the House, by 417 to 3, in late May, although has hit a snag in the excessively
complicated procedures of the Senate.
One important provision would grant plan sponsors expanded safe harbor protection
over their choice of annuities to offer as an in-plan investment.
As to the impact on demand for annuities, observers remain unconvinced. " We're
supporters of the SECURE Act, " says Dave Gray, head of workplace retirement offerings
and platforms at Fidelity Investments in Boston, " but I don't think the answer is a
legislative safe harbor. We're going to get guaranteed income through sponsors making
the right choices in plan design, products and services. " -JK
PLANSPONSOR.com August - September 2019 57

http://www.plansponsordigital.com/plansponsor/august-september_2019/TrackLink.action?pageName=57&exitLink=http%3A%2F%2FPLANSPONSOR.com

PLANSPONSOR - August/September 2019

Table of Contents for the Digital Edition of PLANSPONSOR - August/September 2019