Employers who are considering adding distribution options to defined contribution retirement plans should consider a number of factors, according to a new issue brief.

The brief from the Institutional Retirement Income Council, “The Evolving DC Plan — from Accumulation to De-accumulation,” said that employer goals of “effectively managing their human resources, by motivating high performance and enabling orderly, ‘on time’ retirement” can be advanced by the use of de-accumulation strategies.

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But in considering whether, and how, to add such strategies to a plan, the paper said that employers should also think about several other issues, including whether most defined contribution retirement plans provide for installment payments, periodic payments or some type of annuity product and whether payment options are available for prototype plans, and if so, at what cost.

Other considerations are potential increases in administrative complexity caused by the addition of payment options; why adding a distribution option would be in the best interest of a plan participant; whether doing so will increase the plan sponsor’s exposure as a plan fiduciary; and whether there are any financial benefits for the employer for adding a distribution option.

The brief pointed out that while the most common distribution option, other than a lump sum, for 401(k) plans is a series of installment payments over a predetermined period of time, there are other options — such as the ability to make periodic withdrawals, or to take an annuity that can provide for lifetime income for the participant.

Employers could benefit, it added, by encouraging employees to leave their retirement funds in the plan and in so doing increase the “institutional buying power” of the plan with its investment provider and recordkeeper. That needs to be considered, as well as the potential cost of adding distribution options to a plan and the possible increase in administrative complexity presented by the changes.

The brief also said that plan participants can benefit from a sponsor’s efforts to reduce plan costs via higher balances and greater negotiating power, thus allowing those participants to increase their retirement savings, and in turn their retirement security, through lower plan fees.

Instant Insights /

What employers need to know about distribution options for DC plans

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