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.
Participants need earlier and ongoing communications, education, and access to advice from their employers to help them plan for and turn their DC plan savings into a stream of income in retirement.
Although 80% of plan sponsors say they provide retirement income related communications and/or education, only 38% of participants recalled receiving anything on the topic.
DOL guidance provides a straightforward roadmap for the selection and monitoring of investment managers of participant accounts providing discretionary investment advice.
The consequences of poor decision-making in retirement can be catastrophic. For example, if a newly retired participant makes investment or withdrawal mistakes at the start, or even within the first 10 years of retirement, the impact could greatly affect their income stream much later, when it will no longer be possible to go back to work to replenish their retirement savings.
As a result, participants need earlier, and ongoing communications, education, and access to advice to help turn their DC plan savings into a stream of income in retirement. As a best practice, the conversation should start once an employee enrolls in the plan and continue through their transition into retirement. Plan sponsors and their committees, consultants, and providers should consider whether their current approach should be improved.
This article is part four of our five-part Making Retirement Income Work series, covering plan sponsor and participant perspectives, legal considerations, and best practices around in-plan retirement income solutions. 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 Invesco’s 2022 defined contribution research study, Show me the income, which explored large plan sponsor and participant preferences for creating retirement income.
While almost 80% of plan sponsors said that they have provided communications and/or education to participants – specifically about turning retirement savings into a regular stream of income – just 38% of participants remembered receiving these types of communications. Instead, almost half of all boomers, Gen X and millennials stated they hadn’t received any communications on the topic.
The divide between plan sponsors and participants may be due to two factors:
1. Communications may be too general about the need to create retirement income, and doesn’t specifically discuss next steps, important considerations, and/or highlight the tools and resources available to help. Monthly income withdrawals are generally available in most plans and should be communicated as a retirement income solution and be communicated as such.
2. Specific communications may cover many topics (e.g., an email newsletter) with retirement income planning getting lost.
Participants want specific information and education that’s applicable to their personal circumstance. Across all ages and income levels, the top three preferred topics were:
1. Determining how much money was safe to withdraw on a regular basis.
2. Estimating how much income their savings would create.
3. Strategies for turning their DC plan savings into income using the retirement income solutions available through the plan.
Almost all participants (96%) liked the idea of an automatic “nudge” as they approached retirement to remind them to focus on retirement income planning and consider the retirement income solutions available to them through the plan.
The clear takeaway for plan sponsors and fiduciaries is to communicate with participants about how the range of retirement income solutions work and the needs they fulfill – with a focus on how they can provide flexibility and/or reliability based on the use of the solutions, including combining them – in a manner that meets their individual needs and circumstances.
The Department of Labor (DOL) has historically said that education and information to help participants understand and decide among the retirement income options is not considered to be fiduciary advice.1 In other words, where information and education are provided to enable participants to make informed decisions, plan sponsors will not be considered fiduciary advisers for that purpose. As a result, plan sponsors can work with their consultants and providers to develop participant-focused education programs to help them make informed decisions. Of course, committees should review and approve the communication and education materials to ensure they fairly explain the products and services.
However, for plan sponsors and committees who want to go beyond education, providing participants with access to discretionary investment management advice (through a managed account service) is possible. In fact, the DOL has issued helpful guidance in a Field Assistance Bulletin (FAB).2
This guidance provides a straightforward roadmap for the selection and monitoring of investment managers of participant accounts providing discretionary investment advice:
As a best practice, plan sponsors should consider reviewing their current participant communications, education programs and/or access to discretionary advice, and – together with the plan’s consultant and providers – determine the best approach going forward to help address retirement income.
To learn more, download Fred’s retirement income legal and best practices checklist.
DOL Interpretive Bulletin 96-1.
DOL Field Assistance Bulletin (FAB) 2007-01.
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 3: Combating inertia with auto-enrollment
Fred Reish shares his views on adopting an auto-enrollment approach when adding retirement income solutions.
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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).
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