For plan sponsors and consultants considering the full range of options to support employees’ financial security through retirement, we evaluate how the latest generation of protected retirement income (PRI) solutions can fit into overall plan design.
Previous iterations of PRI products were not widely adopted due to the perception that they were too complex and offered only limited benefits. The PRI solutions on the market today have been redesigned to address many of the common challenges that face employers and employees. Specifically, our research and analysis confirm that the latest generation of these solutions frequently offer better outcomes compared to traditional products such as target-date funds (TDFs), increased portability and more flexibility.
Our findings suggest that PRI solutions are likely to gain traction in the market as the benefits become clearer to plan sponsors and other stakeholders. Insurers and benefits providers should be aware, however, of the need for clear communications and advocacy as they seek to address various barriers to adoption. They will also need to be aware of issues related to transparency, adjacent services (e.g., wealth management) and the comparability of solutions.
The first generation of these products was not portable or liquid and typically featured a single asset class, annuity contracts. TDFs offered in defined contribution (DC) plans provided access to mutual funds, with basic asset allocation of stocks and bonds guided by a standard target date for withdrawal or the beginning of decumulation.
Starting in 2006, the second generation of PRI products combined TDFs and annuities to offer access to index funds and a glide path based on workers’ retirement timelines. They did not solve for portability or liquidity, however. A new class of TDFs and managed drawdown funds employing mutual funds and collective investment trusts (CITs) aimed to do just that. However, without guarantees, income could fluctuate.
Today’s PRI products combine CITs and TDFs with guarantees. Typically, participants have access to a range of underlying index funds (e.g., the S&P 500 Index Fund, US Aggregate Bond Index Fund). They are both portable and liquid and are not proprietary to individual recordkeepers.
According to our research, many stakeholders, including experienced industry professionals, associate PRI solutions with:
- Participant fees or penalties to transfer or withdraw funds
- Fiduciary risk for the plan sponsor
- Lack of portability of funds for the participant
- High administration costs for the plan sponsor
- Solution complexity for the participant
The reality is that most of the protected retirement income products on the market today have been designed to address these issues. They are portable, can be rolled into other types of plans and do not compromise plan sponsors’ and advisors’ fiduciary duties. Fees and penalties for withdrawal and transfer have been eliminated or reduced. The costs for employers, including administrative costs, are often lower than they were previously. Concerns about complex enrollment and investment processes for participants can be addressed with effective communication plans.
Plan consultants have additional concerns related to the criteria they use to recommend products to employers. For example, in our research, many referenced a belief that these products are not suitable for individuals with lower account balances. They also referenced the fear of changes to existing solutions and recommending solutions that few, if any, companies have adopted. The loss of potential wealth management clients and limited transparency due to the lack of a common data set were other concerns.
While our research makes clear that the latest version of PRI solutions largely addresses many common concerns, the industry must address the lack of a common data set and navigate potential impacts on the wealth management business. These issues must be addressed if PRI solutions are ever to achieve widespread adoption.
