In-plan income is key to retirement security

Not having a retirement income solution within a DC plan is like having the pilots on a commercial flight parachute off midflight, forcing passengers to land the plane.

For defined-contribution plans to effectively replace and mirror defined-benefit plans, there must be a viable in-plan retirement income solution. But that’s been tried unsuccessfully for years. If the demand and need are so overwhelming, what’s the problem?

Let us start with the need. Workers lucky enough to have significant retirement assets have three main questions:
1. How do I make sure my assets do not drop significantly before I retire?
2. How do I lock in returns now for the future?
3. What do I do with the assets I have accumulated?

The very small percentage of workers who have access to a financial adviser get guidance on retirement income. But most workers do not and can fall prey to unscrupulous, high-priced annuity sales brokers. That locks up their assets for life or leads them to make impulsive purchases, because they think they are rich.

DC plans have solved, in theory, the retirement outcome or accumulation problem through the automated plan. Emerging innovations like emergency savings, which can help limit loans and hardship withdrawals, and student-debt repayment plans are also helping. The hard part is implementation, with less than half of smaller plans deploying auto-enrollment and less than 20% using automatic escalation of contributions.

A government mandate of auto features is probably needed.

Not having a retirement income solution within a DC plan is like having the pilots on a commercial flight parachute off midflight, forcing passengers to land the plane. DB plans solve the landing problem for those passengers who are lucky enough to board the right plane and stay on the flight long enough to reap the benefits of guaranteed lifetime income. But even in the heyday of pension plans, just 18% of workers stayed at a company with a DB plan long enough to receive the benefits.

Today, DB plans don’t make sense. Companies don’t want the liability, and the vast majority of workers don’t stay with one employer long enough. The growing gig economy is another factor. Can the DC industry devise a guarantee that moves with the employee, like the assets in the plan?

In-plan retirement income plans have not worked for three reasons:
1. Lack of portability.
2. High cost.
3. Loss of control of the assets.

Plan sponsors and workers also lack trust in insurance companies. The SECURE Act gives plan sponsors a safe harbor for retirement income products if they follow recommended due diligence.

One group that’s aware of these issues, as well as the demand, is trying to solve for the problem. Income America is a new collaboration between American Century, Lincoln Financial and Nationwide Financial.

American Century controls the glide path of a target-date fund that includes a guaranteed living benefit, not an annuity. The underlying funds are from other money managers like Fidelity, with Wilshire as the 3(21) fiduciary and Wilmington Trust as the 3(38) fiduciary. The insurance wrapper is shopped every year, with no guarantee that any partner will be retained.

The portability issue remains. Income America’s partner SS&C (formerly DST) provides the middleware for other interested record keepers. Matthew Wolniewicz, who helped fi360 on-board record keepers, is president of Income America and is trying to get other record keepers to partner.

Can Income America or any other retirement income provider succeed? The SECURE Act may help, perhaps along with higher interest rates. But record keepers hold the key to the success of in-plan retirement income — they must be willing to administer the guarantee. Because Income America is a collaboration that avoids the use of annuities, it may have a chance to succeed. It’s important that someone does.

[More: The most dangerous 401(k) myths many plan sponsors still believe]

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ RPA Convergence newsletter.