A defined contribution benefit plan option to help stabilize retirement and reduce risk
Will I be able to retire? is a question many employees are asking. More than 85 percent of Americans believe the nation is facing a retirement crisis1 and 72 percent of surveyed employers feel only some employees will be ready for retirement.2 Part of the issue is that many employers who previously sponsored defined benefit (DB) plans (such as pensions) have shifted to defined contribution (DC) plans (such as 401(k)s), putting employees in charge of managing and bearing the risks of investing for their retirement. A new plan design option, Retirement Annuity Accounts (RAAs), helps bridge the gap between traditional DB and DC plans, providing defined benefit features without the investment risk and compliance requirements of a defined benefit plan.
A solution to help manage risk
The markets have been very volatile in the past decade, and employees are starting to realize their current DC retirement savings are not sufficient. Also, as account balances have grown larger, small market downturns cause thousands of dollar of loss in account value, and the responsibility of managing one’s own retirement has become burdensome on individuals.
A Retirement Annuity Account is a financial product that would help employers and employees manage retirement risk while providing participants a stream of future lifetime payments. RAAs relieve both employers and employees of the burden and risk of investment management by leveraging the expertise of the insurance industry and other annuity providers. Insurers already manage risk for property, health, disability, and death for employees and the general population and are well-suited to take on this role.
A complement to current retirement plans
How it works—an example
This tiered approach provides younger participants with some growth opportunities in earlier years and still provides a long enough horizon where their balances are converted into annuities. It also reduces the interest rate risk, as annuities would be bought over a 20-year period.
The amount of the annuity purchased is based on market interest rates set by the insurance company on a daily, weekly, or monthly basis. These annuities will be tracked by the annuity provider and investment management companies on the employee’s behalf, as with any other retirement plan benefit. Each year starting at age 45, the annuity purchased with the portion of the balance and new contribution will vary based on interest rates, market conditions, and the participant’s age. The annuity amount will grow each year by the current annuity purchased for the employee. The employer may change annuity providers periodically as they do with any retirement plan provider, but is likely to stick with one insurance company if the pricing and services provided are satisfactory.
From the employee perspective…
In terms of account administration, employees under 45 would have their assets in an account that could be rolled over if they change employers. Upon termination from their current employer, participants may be able to withdraw from the portion of their balance that has not been converted into an annuity at any time similar to any other DC plan. The amount that has been converted into an annuity may be withdrawn for limited reasons, and for pricing purposes this amount would be limited to the initial principal used to purchase the annuity. At the time of retirement, employees could also choose to take their annuity in various options depending on their marital status (e.g., over their lifetime or over the combined lifetime of employee and spouse).
A DB-type benefit for DC-level risk
Moreover, RAAs can support employers’ efforts to differentiate themselves and be seen as an employer of choice. Employers can better assure employees have a sufficient source of secure and predictable income at retirement, while reducing the burden on employees for managing risk. At the same time, employers can better manage administrative, compliance, and investment risk burden and cost volatility for a more portable workforce.
1 National Institute on Retirement Security, “New report finds 86 percent of Americans believe nation faces retirement crisis,” Business Wire, March 5, 2015.
2 2014 US Annual Defined Contribution Benchmarking Survey, Deloitte.
3 TW analysis of 2013 Fortune 500.
4 This is an optimal age for annuity pricing and managing interest rate risk, however the age can be different depending on price points and assumed retirement age.
As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.