Lifetime income retirement plans are popular, but at what cost?

Dive Brief:

A growing number of U.S. employers are adding, or considering adding, lifetime income solutions such as annuities to their defined contribution retirement plans, according to a survey from Willis Towers Watson.
Of those surveyed, 30% of plan sponsors offer one or more solutions, an increase from 23% in 2016. Another 60% are either considering adopting solutions or would consider them in the future.
The adoption of lifetime income solutions are part of a trend in which employers seek to help workers create a steady flow of income from their retirement plans. This trend can be linked to the recent willingness among workers to leave their companies if satisfying benefits and opportunities for growth are not presented.

Dive Insight:

Talent acquisition costs much more than retaining employees. The Willis Towers Watson survey proposes one idea: adding lifetime income solutions attractive enough to keep employees’ trust, but what does it cost companies to make this kind of switch? And how should finance executives go about making that call around what can be a tense topic?

“Unhappiness over high fees, inappropriate investment options and other issues have led to a spike in lawsuits in recent years,” an Arizona Republic report found. “The flip side is that many 401(k) programs have gotten better in recent years, partly because of the increased litigation risk.”

David O’Meara, senior investment consultant at Willis Towers Watson, spoke to CFO Dive about the efficacy of adopting lifetime income solutions at companies of all sizes. “These types of solutions can help bridge the gap for a lot of people who are getting to the point of retirement, or around that age, and are uncertain if they have the means to retire,” he said.

CFOs should be aware “it’s really the workforce planning impact that is the most important, as people will retire when they feel confident they can maintain their standard of living.” O’Meara acknowledges that, despite the encouraging results of the survey, some companies are unsure about adopting lifetime income solution plans across the board due to the size of investment. But they needn’t be. “[There are] more solutions on the market today [that are] ready to be implemented that don’t involve tremendous money or time,” O’Meara said. "[Companies] have been offering guaranteed solutions incorporating insurance for decades,” he said. “These are not new products or really new ideas, they’re just new to 401(k). These solutions have been out in the marketplace and have very strong track records."