Plan governance
Making retirement income work part 1: Making decisions
Fred Reish discusses three steps committees should take when adding retirement income options to their DC plans.
92% of surveyed plan sponsors viewed auto-enrolling into a retirement income solution favorably.
Given that participants said their biggest fear is running out of money in retirement, 80% favorably viewed automatic enrollment into a retirement income solution.
Plan sponsors can rely on the same qualified default investment alternative (QDIA) fiduciary safe harbor protection when auto-enrolling participants into a retirement income solution.
The introduction of new concepts in the defined contribution (DC) marketplace can take years to be fully implemented. For example, the idea of automatically enrolling participants into the plan and into a specific investment was viewed with caution when first introduced. Today, 76% of large plans automatically enroll participants into the plan, showcasing its effectiveness and acceptance.1
This article is part three of our four-part Making Retirement Income Work series covering plan sponsor and participant perspectives, legal considerations, and best practices around in-plan retirement income solutions.
DC plan sponsors recognize that auto-enrollment helps participants “help themselves” in reaching a secure retirement. Without it – due to inertia or lack of financial knowledge or confidence – many participants would miss out on the benefits of both tax-deferred savings and investing. Plan sponsors benefit as well by gaining fiduciary safe harbor protection when they select a qualified default investment alternative (QDIA) for defaulted participants who fail to make an investment election on their own.2
As the industry shifts its focus from retirement savings to retirement income, plan sponsors can adopt an automatic enrollment approach when adding retirement income solutions (non-guaranteed or guaranteed) to their plans due to the flexibility of the default rules and the QDIA definitions. Doing so can help combat participant inertia and keep assets in the plan if desired.
In this series, we define retirement income solutions to include a range of flexible withdrawal options, tools, and non-guaranteed investments and/or guaranteed (insured) solutions.
The following perspectives come from Show me the income, Invesco’s 2022 defined contribution research that explored large-plan sponsor and participant preferences for creating retirement income.
When asked, 92% of plan sponsors viewed auto-enrolling into a retirement income solution favorably due to:
Given that participants said their biggest fear is running out of money in retirement, 80% favorably viewed automatic enrollment into a retirement income solution, with the ability to opt out without penalty when notified. This applied to both guaranteed and non-guaranteed solutions. Why? Participants appreciated how auto-enrolling into a retirement income solution would help them with consistent monthly payments, make a choice easy for them, and they weren’t forced to make an investment decision.
Participants who had been automatically enrolled in their plan had the most positive view, as it was already a familiar concept. Even those participants who indicated they worked with an advisor, had higher incomes, or had access to a defined benefit (DB) plan, viewed the concept favorably.
Interestingly, using the right language when discussing retirement income mattered to participants. When described as “automatically enrolling” into a retirement income solution, 77% viewed it favorably. But, when described as “automatically transitioning,” 88% view it favorably – more than a 10% increase.
One of the reasons automatic enrollment has been so successful is the fiduciary safe harbor for the selection of a QDIA for defaulted participants, that is, for automatically enrolled participants who fail to make an investment election.
In that case, if an appropriate type of investment (e.g., target date fund, target risk fund, or balanced fund), service (e.g., managed account), or portfolio (e.g., a collective investment trust) is selected, the fiduciaries, such as plan committee members, have a safe harbor for the decision to use that type of investment, even if it includes a guaranteed solution. Because of the flexibility of the default rules and the QDIA definitions, plan sponsors can, if desired, adopt an automatic enrollment approach to adding retirement income solutions to their plans. However, the selection of a particular investment or service provider is still a fiduciary decision.
The DOL regulation on automatic enrollment is remarkably flexible, stating that if a participant is required to make an election (or a new election) about investments or services, proper notices are given, and an appropriate default investment is provided. A participant who fails to make a new election will be deemed to have decided to invest in the QDIA, and the fiduciaries will be entitled to the protections of the fiduciary safe harbor.
While qualifying investments, services, or portfolios do not, on their face, include guaranteed income products issued by insurance companies, the DOL addressed that issue in the preamble to the QDIA regulation:3
“Finally, with regard to such products and portfolios, it is the view of the Department that the availability of annuity purchase rights, death benefit guarantees, investment guarantees or other features common to variable annuity contracts will not themselves affect the status of a fund, product or portfolio as a qualified default investment alternative when the conditions of the regulation are satisfied.”
The regulation is even more explicit:
“An investment fund product or model portfolio that otherwise meets the requirements of this section shall not fail to constitute a product or portfolio for purposes of paragraph (e)(4)(i) or (ii) of this section solely because the product or portfolio is offered through variable annuity or similar contracts or through common or collective trust funds or pooled investment funds and without regard to whether such contracts or funds provide annuity purchase rights, investment guarantees, death benefit guarantees or other features ancillary to the investment fund product or model portfolio.”
In short, plan sponsors can rely on the same QDIA fiduciary safe harbor protection when auto-enrolling participants into retirement income solutions.
Plan sponsors considering auto-enrolling into a retirement income solution should confirm it fits with the plan’s objectives and update any plan documents as needed (see Part 1: Making Decisions).
Then, the plan committee should follow the DOL’s QDIA fiduciary safe harbor regulations:
To learn more, download Fred’s retirement income legal and best practices checklist.
Callan Institute, 2023 Defined Contribution Trends Survey (Survey of 99 large plan sponsors).
Department of Labor Regulation §2550.404c–5(e)(4).
Preamble to DOL QDIA Regulation, §2550.404c–5 Fiduciary relief for investments in qualified default investment alternatives.
Making retirement income work part 1: Making decisions
Fred Reish discusses three steps committees should take when adding retirement income options to their DC plans.
Making retirement income work part 2: Following a fiduciary process
Fred Reish covers the fiduciary process and best practices around in-plan retirement income solutions.
Making retirement income work part 4: Providing education and advice
Fred Reish shares his views ways plan sponsors can help participants turn their DC plan savings into a stream of income in retirement.
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Reprinted with permission from Fred Reish. While Invesco believes the information presented in this article to be reliable and current, Invesco was not involved in writing the article and cannot guarantee its accuracy.
The information provided is general in nature and may not be relied upon nor considered to be the rendering of tax, legal, accounting or professional advice. Readers should consult with their own accountants, lawyers and/or other professionals for advice on their specific circumstances before taking any action.
The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
This is not intended to be legal or tax advice or to offer a comprehensive resource for tax-qualified retirement plans.
The law and analysis contained in this article are current as of May 2023, are general in nature, and the article does not constitute a legal opinion that may be relied on by third parties. Readers should consult their own legal counsel for information on how these issues apply to their individual circumstances and to determine if there have been any relevant developments since the date of this article. The factual descriptions and information in this article are based upon information provided to us, and we have not undertaken an independent review of that information.
This material is for illustrative, informational, and educational purposes only and is not an offer of investment advice or financial products.
Invesco is not affiliated with Faegre Drinker Biddle & Reath LLP.
Source for all participant and plan sponsor research data: Invesco, Show me the income, 2022 defined contribution research (Survey of more than 1,000 employees of large US companies and 100 large US plan sponsors).
Annuities can be purchased within or outside of qualified retirement plans and traditional IRAs. Annuity benefits and features vary, so an investor should carefully consider whether this product is right for them. Some benefits may incur additional costs. Any guarantee associated with an annuity is subject to the claims-paying ability of the issuing life insurance company. Invesco does not offer Insurance products.
A target date fund identifies a specific time at which investors are expected to begin making withdrawals, e.g., now, 2025, 2030. The principal value of the fund is not guaranteed at any time, including at the target date.
A target risk fund is a type of asset allocation fund that holds a diversified mix of stocks, bonds, and other investments to create a desired risk profile. The fund manager of a target risk fund is responsible for overseeing all the securities owned within the fund to ensure that the level of risk is not greater or less than the fund’s target risk exposure.
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