Spend Down Of Defined Contribution Assets at Retirement

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Chair – Elizabeth Dill
Vice-Chair – Sanford Koeppel

Description

Currently, the predominant form of distribution from defined contribution plans (“DC plans”) is single sum payouts at retirement. As DC plans have emerged as the primary vehicle for retirement benefits, plan sponsors increasingly have become concerned with participants’ ability to understand the risks that they are assuming and to effectively manage their retirement assets post-employment. Additionally, sponsors are finding that there has been acceleration in the development of investment and insurance products that can be offered within or outside of DC plans to guarantee basic levels of income for participants at retirement. In many cases the new products tie guarantees to contributions (and earnings thereon) that are made to a specific investment option prior to retirement.

This working group is going to study the issues and barriers facing:

• plan fiduciaries who wish to add design/investment options for DC plans which provide lifetime income/periodic payments at retirement,

• plan sponsors who wish to offer periodic income options as a DC plan’s default distribution option, and

• DC plan participants as they attempt to evaluate the tradeoffs between the traditional accumulation/lump sum distribution model vs. alternative approaches that guarantee periodic income levels at retirement.

Objective And Scope

The working group is undertaking this topic to discern standards and to draft recommendations for the ERISA Advisory Countil to make that the Secretary of Labor can deliberate upon and take action as the Secretary deems appropriate. The study will focus upon the types of guidance that could help plan sponsors and plan participants make better informed decisions regarding plan investment and insurance vehicles that provide periodic or lifetime distributions. It also will focus on how DOL guidance or regulation can enhance the retirement security of American workers by facilitating access to and utilization of income (stream) distributions from DC plans and expand on the success of PPA's auto enrollment and default investment practices by incorporating these concepts into the distribution phase.

Specifically, the study will determinate whether:

• Additional guidance, regulations or safe harbors could provide plan fiduciaries assistance for choosing and offering investment/insurance products designed to provide and/or guarantee levels of periodic payout;

• Additional guidance, regulations or safe harbors could facilitate broader availability and utilization of income options by participants; and

• Additional guidance or regulations are needed to ensure that appropriate advice and education can be provided/sponsored by the employer to ensure effective participant decision making regarding not just accumulation of assets prior to retirement, but also the spend down of assets during retirement.

The working group recognizes that participants may take distributions upon separation from service that may be prior to retirement age. This topic is focused on the spend-down of defined contribution plan balances at retirement.

Questions For Potential Witnesses

• What types of income streams should be available, and what are the advantages and disadvantages to participants?

• How do current practices in plan distribution design support retirees’ abilities to manage income through retirement; how could they be enhanced?

• What are the current obstacles to offering income options vs. lump sums? Why do participants select lump sum options more prevalently than periodic income options? How can these obstacles be overcome?

• What are the barriers to offering a default periodic distribution option to participants who either leave balances in the plan or who roll account balances out of plans? How can these be overcome?

• What data is available, or that can be shared, regarding how participants utilize account balances at retirement? Is there any other data or studies that can provide insights into participant financial decision making in preparation for retirement? What are the key findings?

• With recent product innovations that tie retirement income guarantees to contributions made during employment:

  1. What types of disclosures and information should a fiduciary analyze when offering these options to participants?

  2. What would need to be disclosed to participants to enable them to make informed choices?

  3. What is the applicability (at what point do they apply, are standards appropriate) of DOL’s proposed Selection of Annuity Provider rules relative to options that have an accumulation component and income guarantees at retirement? What additional guidance is needed?

• What is the best manner to provide participants with education about distribution options (including those that tie income guarantees to investment elections during employment) and the importance of these choices?

• What additional guidance could the DOL provide to plan sponsors offering education related to distribution? Is additional guidance required when the distribution option is tied to investment elections during employment?

• What is the role of financial advisors? What are the fiduciary issues that are presented when an employer/plan sponsor offers 3rd party financial advice regarding decisions related to accumulation/distribution? How can fiduciary issues be mitigated? What might the DOL do to support plan sponsors who provide this to participants?

• Should a future working group undertake a similar inquiry regarding defined benefit plan distributions?