DC plan sponsors take multiple approaches to offer guaranteed income

Amid the paucity of workers taking advantage of in-plan guaranteed income options, there's still a diversity of plan designs now in effect — ranging from annuities to qualified longevity annuity contracts to non-annuity guaranteed minimum withdrawal products.

"We're in the first quarter of retirement income," said Tim Pitney, managing director of investment distribution at TIAA-CREF, New York, using a football analogy.

TIAA has been offering annuities since its founding in 1918. Nine years ago, it launched its first customized target-date portfolio with an embedded annuity. In 2018, it offered the revised version, TIAA RetirePlus Pro, an asset-allocation service that incorporates the organization's TIAA Traditional Annuity, a fixed annuity, in a customized portfolio.

Mr. Pitney said TIAA has 250 clients for its TIAA RetirePlus Pro service as a qualified default alternative investments. The largest client has more than $7 billion in DC assets while the smallest has about $5 million. Aggregate assets committed to the service exceed $18 billion, he said.

TIAA RetirePlus Pro offers three glide path approaches — conservative, moderate and aggressive. The portfolio typically contains 10 to 14 vintages — different years aligned to participants' expected retirement dates — depending on the recommendation of a plan's consultant, Mr. Pitney said.

"During accumulation, the liquid fixed annuity sleeve provides bond-like returns over time with near zero volatility," said Mr. Pitney, explaining that "liquid" means participants can move their money out without penalty.

"At retirement we offer participants the option but not the obligation to turn accumulated savings into income that can't be outlived," he said. In the decumulation phase, "the fixed annuity allocation provides steady income in retirement that can't be outlived."

Guaranteed income via an annuity appealed to executives of The Research Foundation for the State University of New York, said Christa Taylor, director of benefits programs, for the foundation's 403(b) and 401(a) plans called the RF SUNY Retirement Plans. They serve 20,000 participants and have combined assets of more than $2 billion.

Previously, the plans offered an off-the-shelf target-date series. "Our previous standard target-date funds served our employees well but placed more responsibility for lifetime income decision-making on individual employees," Ms. Taylor explained.

"This new approach allows for greater customization of the asset allocation, the glidepath and the underlying investments," she said. "It offers participants an additional risk overlay, meaning they can choose from conservative, moderate or aggressive options." Participants are defaulted into a model portfolio depending on how far they are from a projected retirement age of 65.

Previously, the plans offered a stand-alone annuity product, "but the employees had to act" to invest, she said. This product remains today along with a variety of mutual funds for participants who wish to create their own portfolios, she added.

After about 10 months of study and review, the plans' executives chose the custom model portfolios containing the TIAA annuity in August 2021 as a qualified default investment alternative.

Marketed to participants as the "RF SUNY Target-Date Plus Service," executives explained the new approach through webinars, emails and calls with TIAA representatives. A 32-page transition guide compared a standard target-date series with the new strategy, noting that the latter includes the TIAA Traditional Annuity "which provides a guaranteed return each year." The document said the new service provides "the best features of target-date fund investing with an option for guaranteed monthly income payments for life."

Ms. Taylor said there were very few participant comments. "No noise is always good," she said. Since implementation, the opt-out rate has been 2.6%.

Among other sponsors who have ventured into in-plan retirement income products are three that have won Excellence and Innovation Awards sponsored by P&I and the Defined Contribution Institutional Investment Association:

• The Illinois State Universities Retirement System, Champaign, a 2021 winner, restructured its 401(a) plan, and subsequently its 457(b) plan to include a new default option called SURS Lifetime Income Strategy. It is embedded in a custom target-date series that automatically adjusts as participants reach age 50 to move assets into a guaranteed minimum withdrawal benefit option, which was developed by AllianceBernstein LP. This strategy replaced a fixed annuity because the annuity required participants to annuitize their entire account balance, leading to 60% of retirees taking a lump sum rather than an annuity. The Lifetime Income Strategy is the default for the $3.5 billion 401(a) plan and the $15 million deferred compensation plan. Eighty-percent of 401(a) assets and 56% of deferred compensation plan assets are enrolled in the Lifetime Income Strategy, Beth Spencer, the retirement systems' communications manager, wrote in an email. The annuity option is still available.

"As members become more familiar with how the LIS works and are able to benefit from the gradual securing of income over time, it will most likely become more popular," she wrote.

• Wespath Benefits and Investments, the Glenview, Ill.-based non-profit agency which serves the United Methodist Church, added a feature in April that allows participants in the $7 billion 403(b) plan to purchase a qualified longevity annuity contract. Participants wishing to buy a QLAC must do so when they withdraw money from their retirement accounts, starting anywhere between ages 55 and 74. The payouts for the QLAC's deferred annuity begins at age 80.

"Participants may be eligible for retirement as early as age 55," Kim Olson, director of retirement plans for Wespath Benefits and Investments, wrote in a recent email. "We chose the ending date based on decisions of premium rates for a QLAC with a payment starting age of 80 or 85. When we accessed the starting age of the QLAC, we knew that we needed to offer it at a singular age, because more options can lead to decision paralysis. After much consideration, we thought that age 80 would be more meaningful to participants."

Between April and October, when Wespath won an Excellence and Innovation Award, nearly 30% of participants retiring in 2022 enrolled in the QLAC.

"We review the program annually, considering participant feedback in order to ensure the program continues to meet their needs and expectations," Ms. Olson added.

• A QLAC embedded in a target-date series was a feature added to the $20.6 billion 403(b) plan of the University of California, another 2022 winner of the Excellence and Innovation Award. The QLAC also is available to participants in the university's $5.3 billion 457(b) and $4.1 billion 401(a) plans.

The QLAC, which became available in August 2021, can be purchased by participants between the ages of 62 and 69. Monthly payments start at age 78. Participants must opt in to the QLAC purchase strategy.

"The product features were driven by a listening tour of our stakeholders" including the Academic Senate, human resources and legal staff, Marco Merz, managing director and head of defined contribution, UC Investments at the University of California in Oakland, Calif., wrote in a recent email.

The features were designed to meet university participants' "specific attributes including average retirement age, life expectancy, among others," he added.

Since implementation, the university has made some adjustments. "We have made improvements in particular around communications — more case studies, more one-on-one guidance, more focus on live webinars — after a survey of eligible participants was completed," he wrote.

Mr. Merz noted that the university will assess the success of the QLAC strategy over 10 years. "Current eligible participants are not the core audience as they almost all have a strong pension benefit," he wrote. As these participants retire, more participants will rely more on their defined contribution plans, meaning "the QLAC will become more important for retirement planning."