Sponsors of defined contribution retirement plans can boost participants’ retirement income by up to 20 percent or even more—just by throwing their weight around.

That’s according to a new issue brief from the Institutional Retirement Income Council, which found that the key lies in the use of institutionally priced retirement income generators.

The study looked at three RIGs it said could be used to increase retirement income for participants: systematic withdrawals, immediate annuities and guaranteed lifetime withdrawal benefits.

If sponsors “use[d] their bargaining power, scale, ability to standardize and distribution efficiency to improve the retirement security of plan participants by offering RIGs that leverage institutional pricing rather than retail pricing,” Steve Vernon, president of Rest-of-Life Communications and an IRIC advisor who authored the paper, said in a statement, “[t]hese solutions can potentially increase retirees’ incomes by 5 [percent] to 20 percent or more.”

In the brief, Vernon compared each of the three RIGs under institutional pricing to the comparable RIG with retail pricing outside of a DC plan. He cited a joint report from the Society of Actuaries and the Stanford Center on Longevity that found that two applications of systematic withdrawals “can lead to retirement paychecks that will last longer and in some cases indefinitely, and will be 10 to 20 percent higher with institutional pricing.”

Sponsors can leverage the cost of immediate annuities for participants by conducting annual bids to seek out the most competitive annuity purchase rate at the time of retirement and by cutting the transaction charges based on buying annuities at retail. The study again cited the SoA and Stanford report saying that competitive bidding can potentially boost retirement income by 10 to 20 percent, and that lower transaction charges can also add 4 to 8 percent.

Guaranteed lifetime withdrawal benefits usually charge an annual insurance fee in addition to management fees, according to the study, but with sponsors negotiating for institutional rather than retail rates on behalf of their participants, those fees can end up as much as 200 basis points lower.

The object lesson? Never buy retail, if it can be avoided — even for retirement savings.

Instant Insights /

Sponsors could squeeze out higher retirement income

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