For the past few years, 401(k) plan fiduciaries have been understandably focused on total plan fees. Since 401(k) plan fee disclosure is expected to soon be mandatory both at the participant and plan-sponsor levels, some of the focus has begun to shift toward helping participants get through their retirement years.

Research indicates that participants aren’t saving enough or investing appropriately. It also reveals that participants are afraid that they’ll outlive their savings — something regulators and the new administration are hoping to do something about. One new
vehicle to combat the concerns of market risk and of outliving one’s savings is guaranteed income products … but are the costs worth the potential benefits? 

A Little Background

Over the past several years, 401(k) plans have largely replaced pension plans as the primary retirement savings vehicle, making participants responsible for their own retirements vs. the organizations for which they work. Studies indicate the average deferral rates in 401(k) plans are between 5 and 6 percent per year, while some experts say participants should be saving more in the neighborhood of 15 percent.

For plan participants to meet their retirement goals, it’s important that their portfolios protect against downside risks yet include enough risk to benefit from any market upside. Guaranteed income products have the potential to do just that. 

Are the Costs Worth the Rewards?

Guaranteed income products have three primary benefits: (1) they provide participants with peace of mind that they won’t outlive their savings while providing a monthly income during retirement; (2) they help plan participants protect against downside risks; and (3) they may be aggressive enough in their equity positions to help participants with longer time horizons to meet their ultimate retirement goals.

On the other hand, guaranteed income products are also relatively new, have no fiduciary or safe harbor protection for the plan sponsor, and fees can be very expensive. They also tend to lack options related to underlying managers, and they suffer from a lack of portability that many find disconcerting. (Portability can affect participants, as they generally aren’t able to move these products to other investments, and plan sponsors, as there may be limitations when changing service providers.) Finally, the guaranteed retirement income payments are at risk based on the financial stability of the issuer and their ability to make the payments. 

The Bottom Line

While these vehicles are appealing, there are still hurdles to be overcome. Because of the interest that Congress and other regulators have in retirement for America’s aging population, investments that provide downside protection along with upside potential while ensuring participants don’t outlive their savings are attracting attention. We’ll also likely begin to hear even more about features to increase savings, such as automatic enrollment and automatic annual increases, which may become mandatory if the gap between what participants need and what they have fails to narrow.

Our recommendation to plan fiduciaries today is continue to be aware of and fulfill your fiduciary duties, research the full scope of options that exist for your retirement plan, and consult with your advisors.