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Beware the new shiny object!

Beware the new shiny object!

| April 13, 2024

I had an absolutely wonderful time at the annual NAPA 401k Summit in Nashville. While I enjoyed each session I attended, the Retirement Income for 401(k) Plans training - RI(k) certification (and yes, soon to be another credential on my resume/ email subject to Compliance approval!) - was one that I looked forward to. I will speak more on this topic in subsequent articles but in essence, the training focuses on types of choices in a 401k plan that could pay a retiree income.

Paying a retiree income? Hmm, that sounds like a pension or an annuity, no? When I first heard about the concept of 401k retirement Income, a bunch of questions popped into my head. Here are a few and yes, I will expand more in the next few articles. As always with new topics, I have more questions than answers and I feel this field will develop more of the next 12 - 18 months so stay tuned.

First, what might the right audience be for this type of solution? Initial research indicates that large 401k plans in the manufacturing and healthcare sectors are receptive to this idea. This makes sense in that both of these sectors are familiar with pension and annuity concepts. A plan sponsor should also be wary or cautious if the employee population has a negative view of pensions or annuity concepts.

It is important to also focus on the idea of a large plan. Retirement income solutions can work better when there is a diverse population with a fair number of older employees thinking about retirement. Showing them a reliable income number might be an incentive for an older employee to retire. And an income figure is only as good as the claims paying ability of the company offering the retirement income solution.

In other words, retirement income solutions might not work for a retirement plan with a younger demographic, one that is skittish of pensions and annuities, or a plan with high turnover.

And the income figure must be reliable. The photo header for this article was taken from an actual account today. The income projection calculator seems to be indicating the employee is at 150% of their retirement goal based on a 10% pre-tax contribution with a balance of $190.88. Does something see off to you?

Second, a bunch of random questions have come to mind. A) How portable are retirement income solutions? This is a relevant question as today's younger employees change jobs more frequently than prior generations. B) How transparent are 401k income solutions in terms of fees? There is a fair amount of focus in the 401k space on plan fees. Will these solutions be easy to quantify in terms of cost and benefit? C) While employees may state they have interest in this type of retirement solution, will that translate to demand?

Third, this brings me to my final thought for the night. Beware of the new shiny object. There is a tendency in the industry to be attracted to the new shiny object. Financial wellness is a recent one that come to mind. It is important to see if retirement income solutions are right for your employee demographic. From there, you should research the different options and have a healthy conversation with the providers. Finally, whether you adopt a solution or not, document everything in the decision making process.

I do believe this latest push in retirement income (thanks to SECURE 1.0) is still in its nascent phase. Don't rush boldly or blindly into an option that may not be right for you. Research and look before you leap.