Tuesday, November 3, 2015
Retirement Income Options - In Plan vs. Out of Plan, Revisited
In a recent post on NAPA.net, author Nevin Adams posited five reasons why Retirement Plan Sponsors aren't offering retirement income options inside the plan. Link to article here:
5 Reasons Why More Plans Don't Offer Retirement Income Options
The reasons offered are:
1. There is no legal requirement to provide a lifetime income option.
2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”
3. Operational and cost concerns linger.
4. Participants don’t take advantage of the option when offered.
5. Participants aren’t asking for it.
I think that this is an interesting take. If no one is asking for it, it isn't required and when offered isn't used, that's a pretty good way of saying that there isn't any demand. So if no demand, logically why would one supply. But I think there's a bigger issue which is in Item #3.
Even with the Safe Harbor of offering an annuity option in a plan, many (most?) in-plan solutions are quite expensive. Since we are in an era of fee compression, or as I call it the race to zero. Putting an expensive option into a plan seems like a bad idea, especially when income solutions are readily available post retirement outside of the plan. The other issue has to do with portability concerns which there are various different types that come into play making these types of investments dangerous to put into plans.
Dr. Greg Kasten and I tackled this issue in a Journal of Compensation and Benefits piece back in 2013 titled 'Retirement Income - In-Plan vs. Out-of-Plan Solutions, Which is Better?'. At the conclusion of our piece, it was determined that until this marketplace matures and all practical, fiduciary and operational issues are resolved (not to mention cost), the right format to utilize retirement income products is outside of the plan sponsored retirement plan.
- Jason Grantz