Have you heard about lifetime retirement plans and wondered what they are and how they might impact you as a plan sponsor? A recent Institutional Retirement Income Council (IRIC) report examines the (ERISA) Advisory Council’s recommendations for lifetime plans, explains the concept, and addresses some key questions and concerns.
With the shift from Defined Benefit to Defined Contribution retirement plans, much of our efforts focus on employee participation, contribution deferral rates, and retirement readiness. However, according to the August 2015 IRIC document, Model Notices and Plan Sponsor Education on Lifetime Plan Participation, employers should now also consider extending to retirees lifetime plan participation with in-plan lifetime income solutions.
While retirement savings may reside within a plan until distributions are completed, most plan designs leave participants with little choice but to take a lump sum distribution and roll their retirement savings to an IRA. According to the IRIC this leaves retirees with “little or no fiduciary protection and (they) lose the benefit of the institutional pricing for investments and services that was available to them in their former employer’s plan.”
Instead, the IRIC suggests that if “employees are able to leave their money in their former employer’s plan, where they retain the benefit of fiduciary oversight and more favorable pricing, the benefit is apparent.”
Not surprisingly, providing these modifications to the distribution process poses many questions. The IRIC admits plan sponsors have concerns about the fiduciary responsibilities and costs associated with lifetime plans. However, the Council states: “We believe these fears are unwarranted and that, with adequate education and modest changes in service provider systems, they can be allayed, and perhaps even entirely eliminated.”
Specifically, the IRIC report responds to the following concerns with these (abbreviated) responses:
Newness – While many employers have not offered lifetime participation, some large companies have been doing so successfully for years, and without “difficulty or litigation.”
Additional fiduciary responsibility – If a plan sponsor is acting as a prudent fiduciary to current employee participants, they are fulfilling the responsibility for the retirees in a lifetime plan as well.
Costs – If plan costs are paid from the participant’s account, “retiree accounts that remain in a plan should pay for themselves and not add costs that must be borne by the plan or sponsor.”
Complexity – IRIC does admit that plan documents do require modification since the traditional lump sum distribution option will need to be modified to allow retirees more ongoing access to their money. “When someone retires, the monthly paycheck stops but the monthly expenses do not. Because of this problem, it is not sufficient for a plan sponsor to make the commitment to lifetime participation; it will almost certainly also need to take some action. The action is not difficult, but will require that plans be amended to provide an option for retirees to take periodic, recurring distributions as well as additional distributions to address extraordinary expenses that may arise.”
IRIC states the plan design changes should be straightforward, however the Council does point out that “a plan sponsor will need to address the capability of its recordkeeper to make these types of distributions” without undo costs to the participant.
To address these increased discussions around lifetime income and lifetime plan participation, the IRIC website provides lifetime retirement income evaluation tools to help plan sponsors understand the different types of products that are available along with guidance on the fiduciary review process for selecting a plan.
The rationale behind lifetime plans is understandable. Feel free to contact me to learn more. Together we can determine if this suits your goals, and if it does, then how best to evaluate and adapt your plan accordingly.