DCIIA to DC plan sponsors: It’s time to reevaluate distribution options

Plan sponsors are increasingly reviewing how their plans enable workers who are near and in retirement to access their funds

DCIIA to DC plan sponsors: It’s time to reevaluate distribution options

Jon VoglerTime to read: 2 min

A recent white paper from the Defined Contribution Institutional Investment Association (DCIIA) suggests that plan sponsors reevaluate their plans’ objectives with respect to retired/separated participants, and then determine if the plans’ retirement income and distribution options align with these objectives.Noting that the defined contribution (DC) community’s original focus centered on plan features that support wealth accumulation, DCIIA (a nonprofit association dedicated to enhancing the retirement security of American workers) observes that plan sponsors are increasingly reviewing how their plans enable workers who are near and in retirement to access their funds. With the exception of distributions that are mandated by regulatory policy or law, DCIIA notes that plan sponsors have significant discretion in designing a distribution policy for their plans. Furthermore, plan sponsor distribution policies can play a critical role in participant retirement outcomes.

While the single lump-sum option has been the most prevalent distribution method for DC plans over the last 15 years, DCIIA reports that plan sponsors and consultants are reconsidering whether guiding participants toward lump-sum distributions (including cash-outs, direct rollovers to an individual retirement account and direct rollovers to another employer’s DC plan) is the most appropriate approach. According to a 2016 lifetime income poll, 85% of plan sponsors now believe that retirement income should be the core purpose of a DC plan, whereas four years earlier, only 9% of plan sponsors held that opinion. In response to the 2016 poll, 96% of plan sponsors also said that they support adding at least minimum lifetime-income information (i.e., conversion of account balances into a monthly income stream) to DC plan benefit statements.

Distribution strategies to preserve income streams

While considering benefit payment choices, DCIIA notes that sponsors should keep in mind that plan participants are often trying to figure out how to convert their “nest egg” into something similar to the paycheck they are accustomed to receiving from their employer. The DCIIA recommends that sponsors consider “retiree-friendly” distribution strategies to ensure that their plans provide income streams for retiring participants.

One method a DC plan participant can employ to convert all or some of their account balance into a guaranteed income stream is to purchase an annuity. Income annuities, whether immediate or deferred, create an income stream that cannot be outlived and are therefore uniquely able to provide guaranteed income for life. Other distribution options could include partial withdrawals and installment payment programs.

Reassessing the goals of modern DC plans

DCIIA concludes that retirement income adequacy should be one of the primary goals for DC plans today, given that participants increasingly rely on their accumulated DC assets to provide them with an income stream in retirement, and recommends that sponsors look at the tools and guidance their plans’ service providers currently offer their retirees and near-retirees. Together with enhanced participant education, plan design can be evaluated (and in most cases, changed) to include a range of flexible distribution options. With the proper tools, DCIIA observes that participants may be better empowered to construct retirement income streams that meet their unique needs, affording them the control and certainty needed to achieve a dignified and sustainable retirement.

Source: Defined Contribution Institutional Investment Association, “Design Matters: Plan Distribution Options (Taking Money Out for Retirement),” May 2018

Important information

Blog header image: Wasant/Shutterstock.com

A lifetime income rider (also known as a guaranteed lifetime withdrawal benefit) is an optional benefit (available for additional cost) that guarantees the contract holder can withdraw a specified percentage of a guaranteed benefit base annually for the duration of the contract holder’s life, regardless of account performance.

Annuity product guarantees are based on the issuing insurance company’s claims-paying ability. Annuities contain additional risks and charges, as well as other factors that should be taken into consideration. Investors should review all financial material before investing.

Invesco Distributors, Inc. does not offer annuities.

Jon Vogler

Senior Analyst Retirement Research

Invesco Consulting

Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.

Prior to joining Invesco in 2008, Mr. Vogler spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.

Mr. Vogler earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He earned a BA degree in history from Rutgers, The State University of New Jersey.

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