Will 2019 be a breakthrough year for income products in 401(k) plans?

The table could be setting up for retirement income solutions as about $1 billion is migrating out of defined contribution accounts daily, following retiring baby boomers, according to the Institutional Retirement Income Council.

In 2017, 9.3 percent of all 401(k) plans offered an in-plan lifetime income option to retirement savers, according to the Plan Sponsor Council of America's 61st Annual Survey.

For years, regulators, politicians, and industry stakeholders have been wrestling with an inherent challenge—some would say failure—of 401(k) plans, which have proven to be productive for savings accumulation but limited in their ability to channel sustainable income streams during retirees' de-accumulation years.

The IRIC, a non-profit think tank that supports retirement income product providers and investment professionals, expects more plan sponsors will consider income solutions and other de-accumulation strategies as the industry-wide focus on retirement readiness intensifies next year.

“The continued decline of defined benefit plans along with the Social Security trustees again projecting that both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing will put more pressure on define contribution plans to become income generators for future retirees,” said Bob Melia, executive director of IRIC, in a statement.

With billions flowing out of the $5.3 trillion 401(k) market, plan providers are more motivated to build in-plan solutions to stem the exodus, said Melia. According to the Investment Company Institute, which represents the interests of mutual fund companies, about half of the $9.3 trillion in IRAs is accounted for by plan rollovers.

Here are the four conditions IRIC expects could expedite the implementation of retirement income products in 401(k) plans in 2019:

1. Retirement legislation

On Thursday, the House is scheduled to consider an amendment to a Senate amendment to the Retirement, Savings, and other Tax Relief Act of 2018.

That comprehensive retirement bill, which includes major components of the Retirement Enhancement Savings Act, includes a provision that would make it easier for plan sponsors to provide annuities in 401(k) plans.

That the bill remains an agenda item as Congress faces a Friday deadline to fund the government is clearly a good sign for proponents of retirement reform. At the very least it would serve to set the table for retirement policy in the next Congressional session.

“IRIC expects to see some provisions in the Retirement Enhancement Savings Act, the Family Savings Act and the Automatic Retirement Plan Act to gain additional attention in the 2019 legislative agenda,” the advocacy said in a note. “The enactment of legislation could usher in greater interest and adoption of guaranteed income options for 401(k) and other DC retirement plans.”

2. Market conditions and correction

Bull markets don't last forever. Uncertainty over trade policy and rising interest rates have roiled equity and fixed-income markets in the last quarter of 2018, inspiring more prognosticators to predict a recession in the foreseeable future.

In its outlook, Vanguard says an economic slowdown in the U.S. and other developed markets can be expected in 2019, but that a recession will likely be avoided so long as the Federal Reserve is not over aggressively hiking interest rates.

Nonetheless, market volatility next year could motivate demand for guaranteed income products and other investments that offer downside protection, according to IRIC

“As the market continues to seek direction after 10 years of a bull market, participants could face difficult investment decisions if a market correction occurs. A more challenging stock market along with steadily rising interest rates would cause even well-diversified portfolios to decline in value. How participants react could drive greater proliferation of, and demand for, products offering downside protection, stable value contracts, insurance products such as deferred annuities and guaranteed income benefits, alternative funds and real asset funds.”

3. Industry consolidation

Fee compression and flows out of defined contribution plans from retiring participants, combined with the potential for drawdowns in assets under management in the event of a market downturn, will put pressure on record-keepers' bottom lines.

That potential may inspire wider offerings of guaranteed income products in 401(k) plans to encourage more assets to stay in-plan.

“Such record-keepers could improve their revenues and increase the security of participants by offering institutional income solutions as part of defined contribution recordkeeping services,” says IRIC.

4. Comprehensive view of retirement security and further integration of HSAs and 401(k) plans

The conversation around retirement security has broadened in recent years to include the cost of health care in retirement. That's spurred the prospect of pairing Health Savings Accounts within defined contribution plans, a trend IRIC sees continuing next year.

“HSAs will continue to maintain the spotlight on retirement security as high deductible plans become more popular,” says IRIC. “DC record-keepers that integrate with HSAs will have an advantage as the definition of 'retirement security' broadens to include health care cost late in life. Additionally, the further integration will reinforce the trend of open enrollment including 401(k) plans, giving participants better tools for deciding how to invest HSAs assets while encouraging accumulation of HSA savings for retirement. Ultimately the broader and comprehensive view of retirement security can also help DC providers to consolidate retirement assets in the participant's DC plan and offer drawdown strategies that increase the security of the participants who take advantage of such services.”

Instant Insights /

Top 4 trends shaping retirement income products in 2019

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