November 25, 2015
Like many companies, Wise Alloys froze its defined benefit plan for union employees when the Great Recession hit. Salaried employees didn't have one, and the company's benefits committee felt like it wasn't doing enough to prepare workers for retirement with only a defined contribution plan. "We wanted a product that looked like a defined benefit plan," says Sandra Scarborough, plan administrator for the Muscle Shoals, Alabama-based aluminum can producer. "Our people are looking for a guaranteed monthly income" once they retire. Last year, Wise decided to offer an investment option within its defined contribution plan called IncomeFlex, a guaranteed income product managed by Newark, New Jersey-based Prudential Financial Inc. IncomeFlex is a target-date fund that freezes the target-date fund schedule 10 years before retirement, activating a guaranteed income for participants. When a participant is ready to retire, IncomeFlex guarantees a specific level of income over that person's lifetime to hedge against stock market declines. If a participant leaves the company offering IncomeFlex, the participant can leave IncomeFlex assets if the plan sponsor allows it, or the participant can take the market value or roll the value into a Prudential Individual Retirement Account. Scarborough says she doesn't have an exact usage number but says participants have responded well to the new investment option. "As a company, we felt we needed to do more, and this is a very popular option" for participants, Scarborough says. With the continued descent of the number of defined benefit plans, employers are becoming more concerned about workers having enough money to sustain their retirement. Defined contribution plans, when first introduced, were supposed to be a supplement and not the main driver for retirement savings. Now that these plans are in the front seat, employers are looking at guaranteed defined benefitlike investment options, mostly referred to as "retirement income solutions," to help employees have more secured savings to tap throughout retirement. "I don't think we're going back to defined benefit plans," says Martha Tejera, an actuary and project leader for Tejera & Associates in Bainbridge Island, Washington. "We need to make defined contribution plans more efficient in providing participants reliable retirement income." It seems employers with defined contribution plans agree. In a February study by consulting firm Aon Hewitt, only 4 percent of the 500 employers surveyed said they were very confident their workers would retire with enough assets—a 26 percentage-point drop from the previous year. Helping employees retire with enough money is a top priority for nearly half, or 44 percent, of employers responding to the survey, called 2012 Hot Topics in Retirement. Many employers are expanding savings choices, including offering in-plan retirement income options, similar to what Wise Alloys offered its participants. Today, almost all participants take a lump-sum distribution at retirement. Many go out into the market and purchase annuities, which are insurance contracts that guarantee lifetime income. In-plan income options are a defined benefitlike feature allowing participants to put money in an annuity investment before retirement. Currently, 16 percent of respondents offer an in-plan retirement income solution, and 22 percent of respondents said they plan to adopt this kind of investment vehicle in 2012, Aon Hewitt's survey revealed. "There seems to be a growing sense of urgency in offering these solutions," says Pam Hess, director of research for the Lincolnshire, Illinois-based consulting firm. Data from Prudential also shows an uptick in retirement income solutions being offered by plan sponsors. In 2011, 267 of Prudential's clients had a retirement income solution in their 401(k) plan investment lineup. That is a 58 percent increase from 2009, when Prudential started offering IncomeFlex. "Three years ago, most people didn't know what we were talking about," says Sri Reddy, Prudential's senior vice president for institutional income. "Plan sponsors are now more aware of this need." Meanwhile, providers are finding different ways to offer retirement income solutions. In October, Hartford Financial Services Group introduced the Hartford Lifetime Income, which allows 401(k) plan participants to purchase retirement income shares; each share's price is determined by participant age and interest rate value at the time of purchase and will provide a minimum of $10 of guaranteed monthly income per share for life. So 50 shares would mean $500 per month. "People are wanting some kind of guaranteed income stream, but they want to keep it simple," says Patricia Harris, Hartford's actuary who designed the product. "It's certainty and simplicity of design." For years, plan sponsors toyed with the idea of offering an in-plan solution but were hesitant because of fiduciary concerns, a long-term commitment with an investment company and other issues, Hess says. But just as employees are realizing they need to be better savers for retirement, employers are becoming more aware that they need to provide some type of stability so workers can move out of the workforce at the right time, says Tejera. "We are finally getting to the place where plan sponsors are saying we need defined contribution plans to do more to help us manage our workforce," says Tejera, who recently wrote a brief for the Institutional Retirement Income Council on guaranteed income investments. "Employees don't want to work past their productive lives, but if they can't afford to retire, they are going to stay in their jobs."