That’s a big worry the majority of retirement plan participants, according to industry surveys. Participants also indicate interest in establishing consistent monthly income streams, but plan sponsors are unsure how to go about providing these options. In particular, plan sponsors want to better understand their fiduciary liabilities when providing expanded options.
Participant Perspectives
An Invesco research study, summarized by Plan Sponsor, surveyed and interviewed a broad sampling of plan sponsors and participants from spring 2021-spring 2022, and found that the majority of participants are relying on the funds in their employee retirement plans, with 68% indicating “they were worried they would eventually run out of money….” This fear was true even for those at higher income levels and those already working with financial professionals. Additionally, related to guaranteed income streams, the study revealed:
Participants want a consistent, monthly income stream to reliably cover their basic expenses, including housing, food and transportation, with the flexibility to withdraw additional spending for travel or emergencies. If given a choice, 90% of participants said they would allocate their DC savings into more than one retirement income option….Overall, 94% said they want a guaranteed lifetime income solution that provides stable, predictable income where they won’t run out of money. Though having to make a tradeoff between a guaranteed or non-guaranteed flexible income solution (84%) that allowed them to make changes to their month payments was less attractive, 88% prefer a split between providing reliability and flexibility….Participants felt good about guaranteed income options because they couldn’t run out of money even if their account balance is depleted (96%), it provides stable, predictable income that makes budgeting easier (95%) and its less expensive through an employer than outside of a plan (95%).
Of course retirement plan participants also perceive disadvantages related to guaranteed income streams. For example, participants are concerned about: “lack of control over the monthly payments once they are set (92%), the annual cost (91%) and a lack of access to withdraw larger amounts as needed (90%)….” Nonetheless, only three in ten participants described these concerns as a major deterrent.
Plan Sponsor Considerations
Plan sponsors are paying attention to the rising interest of plan participants in guaranteed lifetime income options. According to Plan Sponsor, the Invesco research found: “Among plan sponsors, 98% felt that offering a guaranteed solution would be a good fit for their participants….Many saw value in how it could help retain plan assets by providing participants with predictable income that was easier to access and less expensive than what employees could get outside of the plan.” The majority of plan sponsors also agreed that it would be worth offering a guaranteed income option even if only a small percentage of participants ended up selecting it.
As plan sponsors work with their advisors to consider how best to incorporate guaranteed income options into retirement plans, many questions—and worries—are top of mind. For example, plan sponsors are eager to better understand
“the potential for additional fiduciary risk to the plan,” as well as the costs associated with the addition of guaranteed income options. Summing up the current view, Plan Sponsor shares:
Sponsors want to offer guaranteed income solutions, but they are worried about the potential for additional fiduciary risk to the plan, higher costs, and a participant’s inability to access larger amounts as needed….Plan sponsors want more information and guidance from advisers and regulators concerning fiduciary risk around guaranteed income products before adding new solutions to their plan menu.
Although plan sponsors can never eliminate the risks associated with fiduciary liability under the high standards of ERISA law, they can mitigate the risks. One way to do so is to get clarity—in writing—from advisors and other service providers about the risks they are accepting. Jeff Coons at High Probability Advisors notes that plan sponsors commonly make faulty assumptions about the fiduciary responsibilities of those they hire and suggests, “To avoid this mistaken belief, plan sponsors should ask advisors and other providers to put their responsibilities and fiduciary status in writing and confirm that status regularly.” The IRS also reminds plan sponsors that selecting and monitoring individuals or companies to manage an employer sponsored retirement are important examples of the fiduciary responsibilities associated with plan sponsorship. Depending on the arrangements, these contractees likely have fiduciary obligations of their own, but plan sponsors retain their own status as fiduciaries. That’s why Colonial Surety offers an affordable Fiduciary and Cyber Liability insurance Package that arms plan sponsors with:
- Legal defense and coverage for penalties against claims of alleged or actual breaches of fiduciary duties.
- Defense against lawsuits and regulatory actions related to a cyber breach.
- Expert-led response, notification and crisis management services to prevent a cyber incident from spiraling into a disaster.
The annual cost of our Fiduciary with Cyber Pack is less than the fee for one hour of expert legal defense if a lawsuit or regulatory challenge strikes you and your business. Let’s get you covered, in minutes, today: Plan Sponsor Protection Package.
Strong Foundation
It is of course important for plan sponsors to continuously monitor the options offered participants and make adjustments appropriately. It is also essential to attend to retirement plan fundamentals. For example, the Department of Labor continues to mandate ERISA fidelity bonds to protect the assets of the retirement plan from theft and failure to have an up to date ERISA bond is a frequent oversight—one that is know to trigger plan audits and investigations. Headed toward year end, make sure your ERISA Bond adequately covers your plan. National expert, Colonial Surety is here to help: we even include retroactive ERISA fidelity bond coverage for years when the plan was not adequately covered. Additionally, we offer cost-saving multi-year coverage, ensuring the ERISA bond remains Department of Labor compliant for the life of its term.
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Colonial Surety was founded in 1930 and continues giving customers the assurance that they, their businesses, and their clients are safeguarded with the right surety and insurance products at all times. We are a direct and digital insurer offering products through an online platform supported with exemplary customer service. We give customers a simple, direct, and instant service that takes the pain out of buying insurance and bonds. Colonial Surety is licensed in every state in the U.S., rated “A” Excellent by A.M. Best, and listed by the U.S. Treasury as an approved surety.