I attended a rather intense Lifetime Retirement Income bootcamp at the recent annual NAPA 401k conference. The idea behind Lifetime Retirement Income is pretty straightforward. A retired employee will receive a fixed amount of income each month. Seems to me like the idea is to imitate pensions of old, no?
The amount can vary based on several factors. For example, a retired employee could get a hire amount if they only want income for a certain period of time that is less than projected. I suspect a retiree would get less upfront if they want the income to continue for a partner/ spouse after the retiree's death. And yes, the income guarantee is only as good as the financial strength of the insurance company that is making the income guarantee.
I found myself pondering who the target audience could be for a Lifetime Retirement Income solution. What sort of company would this appeal to? Correspondingly, where might it not be such a good fit? One size rarely fits all in the 401k industry.
I suspect that companies most likely to seek lifetime retirement income solutions in their 401(k) plans typically fall into these categories:
Employers with older, long-tenured workforce. These firms want to help employees manage longevity risk and transition smoothly into retirement. Some of the sectors that came to mind are manufacturing, utilities, healthcare, and education sectors.
Organizations replacing or supplementing defined benefit (DB) plans. Employers that previously offered pensions often want a similar outcome through DC plans. Yep, the old frozen DB plan organizations would be a likely candidate for this concept. Think legacy corporations and public-private hybrids.
Companies focused on financial wellness and retention. Employers using robust retirement benefits as a recruitment/retention tool. I would think Lifetime Retirement Income solutions would find fertile ground in tech, professional services, and nonprofits with competitive HR strategies. These likely would be larger companies versus the small mom and pop shops.
Unionized or collectively bargained plans. Unions often advocate for income security post-retirement. I would think construction, public sector, and transportation would be likely candidates.
It would likely also appeal to companies with a paternalistic bend to them. Many of my 401k client companies are quick to move former employees with balances under $7,000 off the books and encourage other former employees to move as well.
Finally, this type of income solution might find root in an organization with a participant headcount that is well over 120 people. The retirement plan is thus subject to an annual audit by a CPA firm. To that end, such a company is unlikely to dip below audit limits and accordingly, may be open to the idea of offering this solution.
The Parting Glass
Lifetime retirement income solutions can fit into certain plans. Plan sponsors and fiduciaries need to look at the fees of such solutions to make sure these make sense. I would also suggest seeing what benefit there is in this type of solution. What do retired/ terminated participants get beyond a fixed paycheck? Surveying the plan participants for interest would not be a bad idea either. One size does not fit all and this is true in this context as well.