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Will 2016 be the year plan sponsors begin to demand more in-plan retirement income options?

Analysts at Cerulli Associates have their doubts. The Boston-based consultants recently reviewed sponsors’ perspectives on in-plan annuities.

Of plans with at least $100 million in assets, 21 percent now offer a retirement income product in-plan.

Maybe most notable from Cerulli’s data is that only 6 percent of sponsors said they plan to add an income option.

A lot of sponsors—particularly those of large plans—think participants should leave 401(k) assets in plan after they retire, and draw the assets down relative to an overall income strategy: 43 percent of all sponsors suggested assets should stay put; for plans with $ 1 billion to $5 billion in assets, the number jumped to 53 percent.

Regulators have been trying to stimulate sponsors’ adoption of in-plan annuities for several years, most recently when the Department of Labor issued a field assistance bulletin attempting to clarify a 2008 safe harbor for the selection of annuities in 401(k) plans.

Sponsors have a fiduciary obligation to assess an insurer’s future viability when providing an annuity option for participants, according to the safe harbor.

The DOL’s latest bulletin said the selection of an annuity provider only has to be based on information available to sponsors at the time of selection, “and not based on facts that come to light only with the benefit of hindsight,” according to the bulletin.

At least one retirement expert was leery of the purported clarity behind the DOL bulletin’s release.

“The department may think that their action encourages lifetime income annuities in 401(k) plans, but I think it does precisely the opposite. I think it makes clear that, if you’re worried about fiduciary duty, the way to avoid it is to stop offering annuities,” said Josh Gotbaum, former director of the Pension Benefit Guaranty Corp., in an interview with Bloomberg.

Cerulli’s analysts think regulatory vagary will continue to encourage sponsors’ squeamishness over in-plan income options.

They also say fees on the products will have to come down—they are “generally perceived as too high,” says Cerulli.

The absence of wider adoption of in-plan income options will encourage more participants to roll over plan assets to IRAs, where investors will have better access to annuity products.

Time will tell if 2016 is the year sponsors begin to move the needle on retirement income products.

In our next year in review installment, BenefitsPro probed executives at Prudential, John Hancock and ADP for what they think the foreseeable future holds for the defined contribution market.

 

Sean McLaughlin, VP and head of Client Relations & Business Development for the Total Retirement Solutions line of business within Prudential Retirement

Prudential administers $242,175 billion in defined contribution assets for 2.7 million participants in 4,674 plans

What was the biggest development in 2015 from your perspective?

McLaughlin: Industry consolidation. The trend is true for recordkeepers as well as marketplace intermediaries.

We operate in a very mature, low growth market. Net retirement plan creation has not been a significant source of growth though the economy has been strengthening. The defined contribution space is highly competitive, more than ever in years past due to the lack of growth.

Some providers, in search of strong and sustainable profitability, are consolidating.  That can lead to scale and the ability to address broader set of markets. 

This is true both for recordkeepers as well as intermediaries.  Participants in both of those parts of the retirement value chain continue to try and carve out and secure a strong value proposition.

Some players, like Prudential, are not forced to compete solely on scale. 

Our belief is that we already have strong value proposition–not all tied to recordkeeping, nor to defined contribution. 

Notable parts of our value proposition to plan sponsors: among the top global asset managers; a top provider of guaranteed products in the defined contribution space (stable value and income); pension risk transfer and reinsurance capabilities that give us truly unique capabilities and access to other markets and sources of profit.

 

What developments do you expect for the defined contribution space in 2016?

McLaughlin, Prudential Retirement: Department of Labor regulations addressing role of fiduciaries in and beyond the defined contribution space will be in many headlines throughout 2016. 

That will affect both retirement providers as well as intermediaries. 

I suspect that others may comment in detail on this, so I’ll offer a different perspective:

Driven by the mature market and the search for growth and profitability, providers will continue to broaden their value proposition to develop more broadly relevant and compelling offerings for employers and their employees.

Financial wellness is an example of the broadening of scope of retirement providers.  Multiple major industry participants are working to address individuals’ needs beyond their retirement benefits program. 

Employers are looking for more help preparing their people to address financial challenges throughout their working lives, and in many cases are looking to providers with whom they already have a relationship providing employee benefits–like retirement providers–to address a broader set of needs.

I expect to see multiple defined contribution market participants introducing new offerings, not all of them exclusively focused on meeting employers’ and employees’ retirement benefits needs.

We believe that the ability to drive rapid innovation in solutions will become an even more important competitive dynamic in the defined contribution space in 2016. 

Has there ever been more competition for sponsors’ business?

McLaughlin: Yes–the market is more competitive than ever due to slow growth of the very mature retirement plan market, profit pressure for plan sponsors as well as providers and intermediaries.

Symptoms include industry consolidation, marginal players exiting certain markets, and work across many players to evolve their value propositions to be more relevant and compelling.

 

Peter Gordon, CEO, John Hancock Retirement Plan Services

John Hancock administers $132.1 billion for 3.1 million participants in 56,496 plans

What was the biggest development in 2015 from your perspective?

Gordon: Consolidation in the retirement market clearly shaped 2015. 

It is a result of major financial institutions reevaluating whether retirement is core to their institutional strategic priorities.

Note that I said retirement, not recordkeeping. Recordkeeping is just one of the services a retirement plan provider offers.

Retirement itself encompasses a range of solutions for the individual. 

The providers remaining in the retirement space will need to focus on those solutions if they want to succeed. For John Hancock, retirement is core to our wealth management strategy and we are expanding our capabilities and solutions.

I don’t believe the consolidation trend is limited to 2015. We are going to see it continue well into 2016.

 

What developments do you expect for the defined contribution space in 2016?

Gordon, John Hancock: The impending DOL regulations are going to redefine the DC space.

Even if the regs evolve before becoming final, we are already seeing fundamental shifts in the market.

First, assets are going to stay in plan longer. You are going to see the providers committed to the retirement space investing in solutions that support the individual through retirement.

Second, you are going to see the role of the advisor expand, not contract.  We believe more advisors will embrace being a fiduciary, benefitting both sponsors and participants.

These regulations are going to disrupt the market, but ultimately strengthen it by better protecting the individual.

Has there ever been more competition for sponsors’ business?

Gordon: Consolidation means fewer, but better providers. It doesn’t mean less competition–it means better competition.

Competition drives innovation, and raises sponsors’ expectations of what can be accomplished.

We embrace competition; it drives us to be better.

 

Joe DeSilva, Senior Vice President and General Manager of ADP Retirement Services

ADP administers more than $59 billion in assets for 1.5 million participants in more than 47,600 plans

What was the biggest development in 2015 from your perspective?

DeSilva: The biggest development I’ve seen this year is the way in which providers are using big data to better educate plan sponsors.

Access to this information can give plan sponsors insights into the way plan participants think and make decisions about their retirement, which is an incredibly valuable asset.

By leveraging their access to this data, plan sponsors can make plan design improvements, better manage investment choices and identify issues with plan participants sooner rather than later.

What developments do you expect for the defined contribution space in 2016?

DeSilva, ADP: Plan data and analytics – This will continue to be a big trend in 2016. If plan sponsors choose to utilize the big data analytics providers can offer, I think they will see the benefit: they’ll be better able to provide clarity around what the retirement journey will look like for each of their plan participants, and educate them on the specific steps they should take to achieve a successful retirement outcome.

Focus on plan design – Plan design goes hand in hand with big data analysis. Plan sponsors who leverage the big data their providers offer will be better able to make targeted design upgrades aimed at improving retirement outcomes for participants. In addition to data analytics, I think we’ll continue to see an emphasis on auto features that encourage saving; auto-enrollment and auto-escalation are key in driving plan participation and engagement.

Streamlining plan administration – With costs continuing to rise for employers, many are looking for ways to offer competitive and cost-effective retirement benefits while still producing the best possible outcomes for plan participants. In 2016, employers will continue to seek and embrace solutions that can help them reduce the complexity involved in plan administration but still provides the information employees need to better understand if they are on the right track in saving for retirement.

DOL Fiduciary Proposed Regulation on Participant Investment Advice – This proposed regulation has the potential to significantly impact how advisors assist participants with investment decisions as related to their 401(k) plans.

Has there ever been more competition for sponsors’ business?

DeSilva, ADP: The landscape continues to be crowded as providers work to develop the products, tools and resources to help plan sponsors and their participants better prepare for retirement.

At ADP, we remain laser focused on turning big data into actionable data for our clients.

We think the best way to help plan sponsors and participants is to arm them with the intelligence they need to make better, more informed decisions so they can achieve the best possible outcome when it comes to their retirement.