The IRIC, a non-profit thinktank, expects more plan sponsors will consider income solutions andother de-accumulation strategies next year. (Photo:Shutterstock)

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

The table could be setting up for retirement income solutions asabout $1 billion is migrating out of defined contribution accountsdaily, following retiring baby boomers, according to theInstitutional Retirement Income Council.

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

For years, regulators, politicians, and industry stakeholdershave been wrestling with an inherent challenge—some would sayfailure—of 401(k) plans, which have proven to be productive forsavings accumulation but limited in their ability to channelsustainable income streams during retirees' de-accumulationyears.

The IRIC, a non-profit think tank that supports retirementincome product providers and investment professionals, expects moreplan sponsors will consider income solutions and otherde-accumulation strategies as the industry-wide focus on retirementreadiness intensifies next year.

“The continued decline of defined benefit plans along with theSocial Security trustees again projecting that both Social Securityand Medicare face long-term financing shortfalls under currentlyscheduled benefits and financing will put more pressure on definecontribution plans to become income generators for futureretirees,” said Bob Melia, executive director of IRIC, in astatement.

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

Here are the four conditions IRIC expects could expedite theimplementation of retirement income products in 401(k) plans in2019:

1. Retirement legislation

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

That comprehensive retirement bill, which includes majorcomponents of the Retirement Enhancement Savings Act, includes aprovision that would make it easier for plan sponsors to provideannuities in 401(k) plans.

That the bill remains an agenda item as Congress faces a Fridaydeadline to fund the government is clearly a good sign forproponents of retirement reform. At the very least it would serveto set the table for retirement policy in the next Congressionalsession.

“IRIC expects to see some provisions in the RetirementEnhancement Savings Act, the Family Savings Act and the AutomaticRetirement Plan Act to gain additional attention in the 2019legislative agenda,” the advocacy said in a note. “The enactment oflegislation could usher in greater interest and adoption ofguaranteed income options for 401(k) and other DC retirementplans.”

2. Market conditions and correction

Bull markets don't last forever. Uncertainty over trade policyand rising interest rates have roiled equity and fixed-incomemarkets in the last quarter of 2018, inspiring more prognosticatorsto 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 arecession will likely be avoided so long as the Federal Reserve isnot over aggressively hiking interest rates.

Nonetheless, market volatility next year could motivate demandfor guaranteed income products and other investments that offerdownside protection, according to IRIC

“As the market continues to seek direction after 10 years of abull market, participants could face difficult investment decisionsif a market correction occurs.  A more challenging stockmarket along with steadily rising interest rates would cause evenwell-diversified portfolios to decline in value.  Howparticipants react could drive greater proliferation of, and demandfor, products offering downside protection, stable value contracts,insurance products such as deferred annuities and guaranteed incomebenefits, alternative funds and real asset funds.”

3. Industry consolidation

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

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

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

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

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

“HSAs will continue to maintain the spotlight onretirement security as high deductible plans become more popular,”says IRIC. “DC record-keepers that integrate with HSAs will have anadvantage as the definition of 'retirement security' broadens toinclude health care cost late in life.  Additionally, the further integration will reinforce the trend ofopen enrollment including 401(k) plans, giving participants bettertools for deciding how to invest HSAs assets while encouragingaccumulation of HSA savings for retirement.  Ultimatelythe broader and comprehensive view of retirement security can alsohelp DC providers to consolidate retirement assets in theparticipant's DC plan and offer drawdown strategies that increasethe security of the participants who take advantage of suchservices.”