From Saving to Spending: What Plan Sponsors Need to Know About Retirement Income

Hello and welcome to Williams Mullen's Benefits Companion, a podcast that helps employers navigate the complex legal challenges of managing their employee benefit plans. I'm your host, Brydon DeWitt, and today I'll be discussing retirement deaccumulation and why helping employees save for retirement is only part of the equation for plan sponsors. Much if not all of an employer's focus with respect to retirement plans is on encouraging employees to enroll, designing plans with contribution levels that attract and retain employees and keeping the plans in compliance with ERISA and the Internal Revenue Code.

This is all very understandable and justified. We want employees saving for retirement. We want to compete in the marketplace for talent and we definitely want the plans to be in compliance. We've helped employees save for retirement, but what about the other side of the coin? What happens when employees are ready to retire and actually use these retirement savings? I mean, think about an employee who spent 30 or 40 years building a nest egg within the employer's 401k or 403b plan and then they retire one day and the paycheck stops and they're basically handed a lump sum and said, "Okay, good luck. have a nice retirement.

For the first time in that employees life, they have to figure out how to convert this pile of savings that they have accumulated into a stream of income that has to last for the rest of their life. So employees are faced with new worries as they approach retirement. You know, will their retirement savings last? Do they have enough? What is the consequence of a market downturn during retirement? What about inflation eating away at their nest egg? These concerns and worries can cause employees to be reluctant to even retire. Even if the models show that they have sufficient retirement savings, it's just a new world for them of issues they've never had to consider and it may make them insecure about retiring and certainly cause some anxiety.

Facing these these concerns, aging employees naturally turn to their employer for help. The employer, after all, has helped them save uh for the last 30 or 40 years to establish this great retirement savings. They're going to look to the employer to say, "Well, how do I address these concerns that I have? How can I retire? Do I have enough?" And helping employees cope with these anxieties is a natural function for the employer. they're going to be asked this these questions. But it's also good for the employer because employees may stay on too long. They may be reluctant to retire. And employers can help employees feel comfortable that they know what they can do, know how they can approach retirement and manage their retirement.

Let's think about some tools employers can use to help employees deal with retirement deaccumulation, actually using their retirement savings for the retirement. And one thing to consider are in plan retirement income solutions. Under the Secure Act and the Secure 2.0 Act. It has become easier for plan sponsors to offer lifetime income options inside of a plan such as in plan annuities and guaranteed income products. Congress's goal here was to help define contribution plans such as 401k and 403b plans provide some of the income stream certainty that we had under defined benefit pension plans. We've seen the demise of defined benefit pension plans over the last 10 to 20 years replaced with defined contribution plans such as 401k and 403b plans. And with the Secure Act and Security 2.0 Act, congress is making it easier for employers to create defined benefit type benefits within the context of a defined contribution plan.

The Secure Act created an annuity selection safe harbor that gives plan fiduciaries a clearer process for vetting and selecting an insurer for an annuity product. And the Secure 2.0 Act added more practical protection for plan fiduciaries using that process. In plain English, the Secure Act safe harbor is designed to help a fiduciary evaluate whether an insurer is financially capable of satisfying its obligation under the annuity contract. In a fiduciary under Secure Act can rely on written representations from the insurer that it is licensed by the relevant state insurance department that it has filed audited financial statements under state insurance law that it maintains reserves that satisfy the statutory requirements in the states where it does business and that it undergoes financial examination by state insurance regulators at least every 5 years. The insurer also has to represent that it will notify the fiduciary if circumstances change after providing those representations.

And then the Secure 2.0 Act even sharpened this rule further in a few important ways. It clarified that fiduciaries do not have to select the lowest cost annuity provider as long as the costs are reasonable in relation to the benefits and administrative services provided. It also clarified that fiduciaries were not required to review all available annuity contracts in the marketplace. And it confirmed that if the fiduciary receives the required insurer representations and does not have contrary information, the fiduciary can treat the insurer as financially capable for safe harbor purposes. What the Secure and Secure 2.0 Act did was provide fiduciaries with comfort that if they receive the written representations from the insurance carrier that it can offer the annuity product under the 401k plan which will allow employees to convert that lump sum into a guaranteed income stream through retirement.

Another option for employers to consider is manage payout and systematic withdrawal features. Some record keepers now offer tools that help employees set up automatic scheduled withdrawals and creating a retirement paycheck essentially from their balance. So, this would not be a guaranteed annuity. The balance would still be subject to investment losses, but the employer can allow employees to set up just a systematic withdrawal, a monthly payment as if they're getting a paycheck coming from their 401k or 403b plan.

A third tool is to simply allow participants to stay in the plan. So many 401k plans, the only distribution option is a lump sum. So the employee gets the entire account balance. They can then roll it into an IRA and manage it themselves. One option employers may want to consider is allowing employees to stay in the plan and revise the plan document to allow partial withdrawals. So the employee on their own can take money out as they need it from their 401k plan and then benefit from the institutional pricing that the employer may have under the plan benefit from the plan's investment options being vetted by the employer's retirement committee and investment advisors and it merely may be a better option for the employee than managing an IRA on their own.

And then a fourth tool is financial wellness. Retirement is the moment employees need access to personalized guidance whether through managed account services, financial planning resources or access to advisors. So many investment advisors investment managers, recordkeepers offer products that provide advice to employees about their retirement plans. And employers should consider taking advantage of the financial wellness opportunities that they have with their vendors to help educate employees.

Some takeaways as we wrap up this podcast.

One, ask your record keeper and advisers what lifetime income and managed payout options are available under your current platform. Many plan sponsors have features available to them that they simply are not aware of.

Second, review the plan document and what it says about distributions and see if there's opportunities to amend the plan to allow employees more flexibility with taking, for example, partial withdrawals.

Third, evaluate whether to add an in plan income solution such as the an annuity guaranteed income contract. And if you do decide to do that, make sure you file with the Secure Act and Secure 2.0 Act Safe Harbor to make sure that you're in compliance from an ERISA fiduciary perspective.

And fourth, strengthen the advice and financial wellness resources available to employees who are approaching retirement.

That'll wrap up this episode of the Benefits Companion. If you have any questions or suggestions for future episodes, please contact me, Brydon DeWitt. You can also visit our Employee Benefits page at williamsmullen.com/employeebenefits.

There you can find out more about our team as well as past episodes of this podcast and legal alerts. Finally, be sure to subscribe to this podcast to be notified when our next episode posts. Thanks for listening.

_{This podcast contains general condensed summaries of actual legal matters, statutes, and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Individuals with particular needs on specific issues should retain our services or the services of other competent counsel.}