Retirement income In-plan vs Out-of-Plan Solutions

Retirement Income—In-Plan vs. Out-of-Plan
Solutions, Which Is Better?
Dr. Gregory W. Kasten* and Jason E. Grantz Unified Trust Company, NA**

The deŽned contribution re- In the average 401(k) plan of the plan participants. In the
tirement plan model has re- only one in four plan partici- deŽned contribution structure
placed the deŽned beneŽt pants (25%) will achieve retire- the plan participant must be
model plan as the employer ment success—deŽned as hav- their own economist, actuary,
preferred, privately funded, re- ing enough assets to match the investment manager and con-
tirement plan for America's future liability of their retirement sultant in order to achieve an
workers. Since participants are costs. 2 This is a poor value adequate stream of income to
becomingly increasingly re- proposition in relation to the Žnance the remainder of their
sponsible for their own retire- amount of money spent to run lives. Not only must they make
ment planning, it is now recog- 401(k) plans which can be quite the correct calculations but they
nized that a successful deŽned expensive.
must also implement the actions
contribution plan must do much that are required. Working
more than simply provide an at- In the deŽned-beneŽt plan against the participant is the
tractive website and good in- structure the employee was not high probability that they will
vestment choices. The plan required to make any decisions. not have the expertise to make
must actually serve as a retire- Decisions such as whether or the calculations and the pres-
ment plan to adequately replace not to enroll in the plan, how ence of behavioral inertia in the
the workers' paycheck for as much to save, how to invest the form of disinterest, procrastina-
long as they live in retirement.1 portfolio, economic assump- tion or simply feeling
In other words, deŽned contri- tions, expected rates of return, overwhelmed. Since plan par-
bution plans must function more expected ination and most ticipants face these barriers,
like traditional deŽned beneŽt importantly the future beneŽt even if they make the correct
plans in order to improve the goal that was targeted were all calculations, they rarely imple-
outcomes of plan participants. done by professionals on behalf ment the required steps. These

*GREGORY W. KASTEN, MD, MBA, CFP®, CPC, AIFA®, is the Founder and CEO of Unified Trust Company. He has
published more than 75 papers on financial planning and investment-related topics in various financial and business journals;
written two editions of the book Retirement Success; and in 2005 he co-authored the first place winning paper entitled: “Post
Modern Portfolio Theory” and presented the paper at the Financial Planning Association national meeting. Dr. Kasten has given
dozens of lectures on fiduciary best practices to pension professionals and Federal banking regulators. In 2007–2009, Medical
Economics listed Dr. Kasten as one of “The 150 Best Financial Advisers for Doctors” in the country. In 2011 Dr. Kasten was
inducted into the Advisor Hall of Fame by Research Magazine. He has more than twenty-five years of investment experience and
has been with the company since he founded it in 1985.
**JASON E. GRANTZ, QPA, QKA, AIF® is an Institutional Consultant for Unified Trust Company. He is highly specialized in
all areas of retirement plan and pension consulting including plan design, operations, asset management, investments, fiduciary
basics and advanced fiduciary plan governance. Mr. Grantz has spoken at many industry conferences and events for groups
such as the Financial Planning Association, the Society of Financial Service Professionals and the American Society of Pension
Professionals & Actuaries where his main focus is providing clarity on often misunderstood retirement plan topics.
Journal of Compensation and BeneŽts E January/February 2013
© 2013 Thomson Reuters
18

Retirement Income—In-Plan vs. Out-of-Plan Solutions
factors have historically pro- throughout the savings accumu- as target date retirement funds.
duced the high failure rates in lation process, the retiree will They can be oered in a guar-
the traditional 401(k) plan. now face the new risk of anteed or non-guaranteed
longevity. They do not know structure.
Realistically, 401(k) partici- how long they will live nor what
pants face not one, but two im- the future market returns will IS THERE REALLY A
mense challenges. The Žrst, as be. There is a large amount of DEMAND FOR IN-PLAN
described above, is to simply uncertainty in trying to obtain RETIREMENT INCOME
identify and then to remain on retirement income security. The SOLUTIONS?
track for an adequate amount Žnancial services industry has
of asset savings sucient to recognized this need and is at- A dichotomy exists between
cover future liabilities. The sec- tempting to respond with prod- the perceived demand of plan
ond is how to take that savings ucts engineered to deliver participants for retirement in-
and convert the lump sum as- income. Some of these prod- come and actual usage when
set value into lifetime monthly ucts are delivered within a quali- the products are oered in the
income sucient to reliably Žed retirement plan (“in-plan” plan. Although some 82% of
replace their paycheck. Con- solution) and others are deliv- middle income Americans agree
cerning the second challenge, ered outside of the plan; for that “having a retirement income
the need for reliable retirement example in a managed account product in their plan is a good
income solutions has become or IRA structure (“out-of-plan” idea,” less than 1% of plan as-
more evident each year. In ad- solution). The in-plan solutions sets are actually invested in the
dition to market risk and ina- can be stand-alone products or products when they are
tion risks which they've faced embedded in investments such oered.3

Exhibit 1

The Žrst mutual fund to pro- was the Blackrock LifePath Žxed-income asset class with a
vide guaranteed monthly in- Retirement Income target date pool of unallocated deferred an-
come throughout retirement fund. By replacing the traditional nuities, it was designed to auto-


19

Journal of Compensation and BeneŽts
matically build retirement in- CONCERNS OF PLAN lack of benchmarking and mon-
come alongside a growth SPONSORS ARE MANY itoring guidance for the new in-
portfolio. In theory, it was to be WITH IN-PLAN SOLUTIONS plan retirement income solu-
easily implemented, portable tions; and (4) the risk of
The primary observed ob-
across record keepers and Žduciary liability for the failure
stacles to inclusion of a lifetime
simple to communicate to of meeting participant
income option in a deŽned con-
expectations.
participants. Despite a huge tribution plan are at least
marketing campaign and the fourfold: (1) plan sponsor fear A recent survey study con-
well established Blackrock of Žduciary status, particularly ducted by PIMCO identiŽed
name, since its launch in 2009 regarding uncertainty as to many concerns by plan spon-
it has had zero plans sponsors when a plan sponsor will be sors in addition to the signiŽ-
adopt the fund. As of this writ- acting as a Žduciary; (2) the ex- cant Žduciary issues mentioned
ing it is not shown on the Black- penditure of time and resources above.4 Chief among those was
rock website. needed to satisfy regulatory the fear of insurance company
and other legal requirements for default (perhaps many years
specialized products; (3) the into the future) and higher costs.

Exhibit 2

REQUIRED IN-PLAN is why, unlike an accumulation vehemently opposed to a man-
PRODUCT FEATURES investment decision, the deci- datory system.
THAT ARE STILL MISSING sion to participate in a retire-
ment income solution should be Diversify Insurance Carrier
Non Mandatory Solution:
an active decision on the part Risk: There is a need for mul-
Many retirement income solu-
of the participant rather than a tiple carriers to diversify the in-
tions require a long-term com-
passive decision (such as surance risk. When a risk is
mitment on the part of the par-
defaulting). The DOL received protected by a counter-party
ticipant in order for that
participant to experience the many interesting comments (such as with an insurance
beneŽts of the solution. In some (nearly 1,000) in their recent product), prudence dictates that
cases, early withdrawal or can- Request for Information on re- this risk should be spread
celation can be excessively tirement income.5 The vast ma- across multiple insurance carri-
wasteful for the participant. This jority of public comments were ers, to the extent that this is

20

feasible and practical. In addi- pants will now have to be vet- Reasonableness: When solu-
tion a mechanism should exist ted and discussed when mak- tions are created and distrib-
to replace an insurance carrier ing platform changes. This uted to a large group, the group
if the plan Žduciaries deem it creates potentially new Ždu- should beneŽt through lower
necessary, without disrupting ciary risks. fees. Ideally, natural economies
the retirement income solution. of scale would occur meaning
This would, in essence, mitigate
Consolidating Product the buying power of the group
the risk associated with a po-
Rollovers: Currently, a major would be better than that of an
stumbling block for the in-plan
tential insurer defaulting or be- individual. Further, there should
solution is that employees can-
coming less credit worthy. be clear transparency of both
not roll over fragmented income
implicit and explicit fees. Fee
Portability: The American products into a single entity.
transparency should extend to
workforce has always been The solution would be for the
the discrete features of the
mobile and portability of in-plan employee to be able to combine
solution similar to an a la carte
retirement income solutions is a several retirement income prod-
menu. For instance, it should be
signiŽcant issue. There are two ucts into a like kind “rollover”
clear what fee is being charged
portability problems for the par- whereby they can combine with
for investment management
ticipant and one for the Plan their current employer the other
versus longevity protection.
Sponsor. One issue for the par- in-plan income accounts from
Once the fees are identiŽed and
ticipant is the recordkeeping of prior plans. To avoid potential
clear, the plan sponsor can
the retained static asset after non-discrimination issues, and
make a fair comparison across
the employee has left the Žrst to comply with the beneŽts,
the alternatives available. In ad-
company. The second issue is rights and features rules, this
dition, it should explain which
whether employees (and plan must be done in a way that is
parties are being paid for pro-
Žduciaries) can eectively moni- actuarially fair or equivalent.
viding which features within the
tor and manage small retirement The value of the combination
product or solution. This will al-
income retained balances in rollover should be no less than
low the plan Žduciaries to meet
multiple plans as they move the value of the prior individual
their obligation of fee
from employer to employer over parts. Today it is taken for
reasonableness. Where multiple
their working career. Individuals granted that several IRAs hold-
parties are providing beneŽts
should be able to take their ing traditional assets can be
and collecting fees, cross-
retirement income solution out combined into a single large
subsidies (if any) should be
of the plan if they wish. On the rollover. This does not yet exist
transparent. These products
in the retirement income indus-
plan sponsor level, portability should be transparent enough
try because one insurer will not
concerns can have the conse- that any participant could un-
necessarily be providing the
quence of creating a substantial derstand who and how much
same beneŽt as another insurer,
barrier in changing from one they are paying and what ser-
or use the same actuarial or
provider to the next as deemed vices they are receiving for their
interest rate assumptions. Until
prudent by that plan sponsor, fee. Further, some Žxed annui-
that happens portability will be
retirement plan committee or ties do not carry an expense
a signiŽcant issue. No clear
trustee. The considerations re- ratio and may oer many fea-
solution seems anywhere near
garding lack of portability of tures and options for payments
on the horizon.
singular investments acquired so it can be dicult to make an
by a few or less of the partici- Fee Transparency and apples-to-apples comparison.

21

Survivor Options: We know their retirement savings. This consent because the deferred
that many people reach retire- process was the initial step in a annuity is accounted for sepa-
ment as part of a couple rather joint initiative between the Trea- rately from the rest of the indi-
than as individuals and, as such, sury Department and the De- vidual's account.
consideration should be given partment of Labor to help in-
crease savings and retirement Qualified Longevity Annuities:
in the solution design for op-
income. Their goal is to provide Longevity annuities provide re-
tions that allow income to con-
incentives for retirees to move tirees with a guaranteed stream
tinue (in whole or in part) be-
away from the current trend of of income for life beginning at
yond the life of the Žrst-to-die
taking lump-sum retirement plan an advanced age. The Treasury
of the couple. This would be a
distributions instead of annuity Department issued proposed
standard Žnancial planning ex-
distributions. regulations to address certain
ercise for any couple using a
legal impediments to the oer-
Žnancial planner. Why shouldn't Applying Survivor Annuity ing of longevity annuities as a
it be part of one of these income Rules to Deferred Annuity distribution option under a de-
solutions? Contracts: Revenue Ruling Žned contribution plan. Partici-
2012-3 dealt with the applica- pants can purchase these types
NEW REGULATORY tion of the spousal consent of annuities with a small portion
GUIDANCE ON rules (qualiŽed joint and survivor of their account balance and
RETIREMENT PLAN
annuity or “QJSA” and qualiŽed therefore insure against outliv-
LIFETIME INCOME
pre-retirement survivor annuity ing their retirement savings.
OPTIONS
or “QPSA”) to a deŽned contri- Before these new regulations,
In 2008 the DOL issued its bution plan that oers a de- oering longevity annuities in-
Annuity Selection Safe Harbor ferred annuity contract as in- side a deŽned contribution plan
Review notice dealing with an- vestment option which is would generally have violated
nuities in deŽned contribution accounted for separately from the required minimum distribu-
plans. In 2012 the Internal Rev- other investment options of- tion (RMD) rules of Code Sec-
enue Service and the Treasury fered under the plan. Although tion 401(a)(9).
Department released three ar- spousal consent does not come
The regulations tackle the
eas of new guidance that aimed into play for purposes of the
limitations imposed by the RMD
to increase the availability of purchase of the deferred annu-
rules by creating qualiŽed lon-
annuities and other lifetime in- ity contract, the ruling clariŽes
gevity annuity contracts
come options as forms of pay- how the QJSA and QPSA rules
(“QLACs”) and providing that
ment under deŽned contribution apply once the participant has
amounts invested in QLACs are
retirement plans. The guidance invested in the deferred annuity
excluded for purposes of the
was issued to encourage plan contract by using three sce-
RMD rules. With a QLAC, par-
sponsors to oer these lifetime narios distinguished by the fea-
ticipants would have the protec-
income options in addition to tures of the particular deferred
tion of additional retirement
lump sum payments that are annuity contract. In all three
income later in life in case they
particularly prevalent in deŽned examples, the portion of a par-
“outlive” their retirement
contribution plans. The guid- ticipant's account balance
savings.
ance was also aimed at helping which is invested in options
with the issue of many retirees other than the deferred annuity In order to qualify as a QLAC,
either outliving or underutilizing is not subject to the spousal the longevity annuity must meet

22

certain speciŽc requirements, tion rolled over from the deŽned ment funding should focus on
including premium limits, a com- contribution plan. In order to ad- that individual's unique set of
mencement date of no later dress issues raised by other facts and circumstances rather
than age 85, a death beneŽt for deŽned beneŽt plan rules (e.g., than historical data or group
surviving spouses, being explic- Code Section 415(b) annual statistics. This is the fundamen-
itly designated as a QLAC, and limit, Code Section 411(c) em- tal dierence between a “one
not having a cash refund ployee contributions being non-
size Žts all” in-plan income
feature. The proposed regula- forfeitable), the IRS stated that
product based upon a hypo-
tions would apply to contracts the rollover does not violate
thetical person and the exibility
purchased on or after the publi- such other rules if the deŽned
obtainable via an out-of-plan
cation date of the Žnal beneŽt plan converts the roll-
regulations. over amount to an actuarially solution. Given the needs and
equivalent annuity by using the unique situation of each retiree,
Rollovers to Defined Benefit applicable interest rate and ap- retirement income cannot be
Plans: Revenue Ruling 2012-4 plicable mortality table under distilled into a single “product.”
provides guidance to employers Code Section 417(e). Conse-
who are willing to allow rollovers Since future events are al-
quently, the beneŽt attributable
from their deŽned contribution to the rollover amount is treated ways unknown to individuals,
plans into their deŽned beneŽt as non-forfeitable and would the ongoing process must con-
plans (including cash balance not count toward the annual stantly monitor the potential
plans) with the ultimate goal of beneŽt limit under Code Sec- surplus and the potential safety
giving participants the opportu- tion 415(b). The ruling applies of the retirement nest egg while
nity to purchase additional an- prospectively to rollovers that maintaining exibility to be able
nuity beneŽts under the deŽned are made on or after January 1, to adapt to new circumstances
beneŽt plan. Although these
2013. as they arise. Success in retire-
kinds of rollovers were not spe-
ment is achieved through a
ciŽcally prohibited in the past, RETIREMENT INCOME IS highly personalized process
there was very little supporting BEST DELIVERED AS AN
guidance available. The lack of unique to each person's individ-
OUT-OF-PLAN SOLUTION
speciŽc guidance acted as a ual goals and circumstances.
THAT IS PROCESS DRIVEN
deterrent for allowing these An out-of-plan solution will pro-
In summary, because of the vide retirees and soon-to-be
types of rollovers. The guidance
many diculties with in-plan retirees with the conŽdence
uses a model deŽned contribu-
solutions as described in this they need to fully enjoy the
tion plan to which joint survivor
article, it is the opinion of the beneŽt of retirement knowing
annuity rules do not apply and
authors that retirement income that their paycheck will be reli-
which does not permit after-tax
is best delivered as an out-of- ably replaced for the remainder
contributions.
plan solution that is process
of their lives.
The annuity that becomes driven rather than product-
available under the deŽned ben- centric. Each retiree has only Comparison of Current In-
eŽt plan is the actuarial equiva- one opportunity to retire; the Plan Solutions with Out-of-
lent to the lump sum contribu- planning and executing retire- Plan Solutions


23

Exhibit 3

4
NOTES: Dramatically Increases Retirement Exploration of Retirement Income
Success and Improves Plan Cost/ Solutions and Issues, EBRI Policy
1
Kasten, G. “The DeŽned Goal BeneŽt Structure, July 2012, © UniŽed Forum, May 7, 2009 Washington DC,
Retirement Plan,” Journal of Pension Trust Company, NA. Sponsored by PIMCO.
BeneŽts, Autumn 2009, Vol. 17, No. 1,
3 5
pp 23–44. Source: 2010 Wells Fargo Retire- http://www.dol.gov/ebsa/regs/
2
Kasten, G. “The UniŽedPlan® ment Study. cmt-1210-AB33.html.


24

Retirement income In-plan vs Out-of-Plan Solutions

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Destaque

Destaque (6)

Semelhante a Retirement income In-plan vs Out-of-Plan Solutions

Semelhante a Retirement income In-plan vs Out-of-Plan Solutions (20)

Mais de The 401k Study Group ®

Mais de The 401k Study Group ® (20)

Último

Último (20)

Retirement income In-plan vs Out-of-Plan Solutions