Misperceptions: Addressing plan sponsor concerns about in-plan guarantees

08/18/2023 — Key takeaways:

• Despite growing participant interest, some plan sponsors struggle with misperceptions about guaranteed lifetime income solutions.
• According to a Nationwide survey, 90% of participants indicated they would be at least somewhat likely to roll over a portion of their current retirement savings into a guaranteed lifetime income investment option if it was offered by their employer.

The retirement industry has largely shifted from defined benefit plans to defined contribution plans in recent decades, leaving American workers to shoulder the burden of owning their retirement planning. This shift may create a planning gap for many workers they near retirement age and need to figure out how to turn their savings into a secure and predictable stream of income in retirement. Plan Sponsors can help close this gap for their employees and deliver higher retirement confidence with in-plan guarantees.

These solutions offer participants an opportunity to grow their retirement savings with the confidence that they can generate guaranteed income they won’t outlive, removing at least one unknown for those trying to understand what their finances will look like in retirement.

Nationwide is seeing tremendous interest from retirement plan participants, with nearly 90% indicating they would be at least somewhat likely to roll over a portion of their current retirement savings into a guaranteed lifetime income investment option if it was offered by their employer, according to a recent Nationwide Retirement Institute^® survey.

Plan sponsors’ interest is also gaining traction, as nearly half of those who currently offer them say the employer believes guaranteed lifetime income solutions are a great option for employees. However, the survey found some plan sponsors still hold a few key misperceptions about these guaranteed lifetime income solutions regarding added costs and responsibilities, which may be standing in the way of further plan and participant adoption. Let’s take a look at what we heard from plan sponsors who may still have some reservations about these solutions and tackle these concerns directly.

Of plan sponsors who do not currently offer guaranteed lifetime income investment solutions:

View the infographic

Misperception #1: 20% of plan sponsors are concerned that in-plan guarantee solutions are too complex

The Truth: Many of these solutions are structured as a target date fund held within a collective investment trust (CIT). This offers a simplified experience that can provide access to growth potential while offering guaranteed lifetime income – all offered in one simple investment option in their retirement plan.

Many are also flexible. If a participant decides they want to access or do something different with their money, there is no surrender charge for moving money out of an in-plan guarantee investment option. That means they can access their money at any time during either the accumulation or decumulation phase, although doing so may impact their amount of guaranteed lifetime income in retirement.

Misperception #2: 24% of plan sponsors are worried that fees passed on to employees are too high

The Truth: Compared with what a participant may be used to seeing in their plan’s investment lineup, the fees for in-plan guaranteed lifetime income solutions could be higher. However, the overall cost is typically lower than similar investment options offered outside the plan. That’s because they’re offered within a group retirement plan where the participant benefits from reduced expenses, many of these solutions are structured as target date funds held within a collective investment trust (CIT) and the CIT structure can help to provide lower costs versus mutual funds¹.

Misperception #3: 27% of plan sponsors are concerned that administrative costs are too high.

The Truth: Generally, there is no explicit cost for plan sponsors. There is some additional work applying existing fiduciary standards in the evaluation and adoption of these solutions, which is consistent with any plan sponsor’s ongoing fiduciary duty to explore new or diversified solutions to ensure employees have the right menu of investment options to choose from. The work involved in evaluating or implementing these solutions is consistent with efforts most plan sponsors routinely implement to help ensure they are optimizing their investment line-up as part of their ongoing fiduciary responsibility.

Misperception #4: 24% of plan sponsors are concerned about increased fiduciary responsibility associated with in-plan guarantees

The Truth: The SECURE Act of 2019 provided new fiduciary safe harbor guidelines for plan sponsors in the selection and on-going monitoring of guaranteed lifetime income products and the insurers who provide them. Solution attributes such as features, benefits and the financial strength of the insurer should be considered in conjunction with cost. It is worth noting that the SECURE Act’s new safe harbor includes a clarification that a plan fiduciary is not required to select the lowest cost option. To review a full list of fiduciary considerations, see our guide.

Misperception #5: 17% believe their employees are not interested in guaranteed lifetime income investment options.

The Truth: According to Nationwide’ survey, almost 60% percent of participants are interested in a guaranteed lifetime income investment option. And they’re ready to get started with one once their employer offers it, with nearly 9 in 10 at least somewhat likely to rollover a portion of their current retirement savings into one.