Making retirement income work part 4: Providing education and advice

The consequences of poor decision-making in retirement can be catastrophic. For example, if a newly retired participant makes investment or withdrawal mistakes at the start, or even within the first 10 years of retirement, the impact could greatly affect their income stream much later, when it will no longer be possible to go back to work to replenish their retirement savings.

As a result, participants need earlier, and ongoing communications, education, and access to advice to help turn their DC plan savings into a stream of income in retirement. As a best practice, the conversation should start once an employee enrolls in the plan and continue through their transition into retirement. Plan sponsors and their committees, consultants, and providers should consider whether their current approach should be improved.

This article is part four of our five-part Making Retirement Income Work series, covering plan sponsor and participant perspectives, legal considerations, and best practices around in-plan retirement income solutions. In this series, we define retirement income solutions to include a range of flexible withdrawal options, tools, and non-guaranteed investments and/or guaranteed (insured) solutions.

Helping participants understand, and plan for, retirement income.

The following perspectives come from Invesco’s 2022 defined contribution research study, Show me the income, which explored large plan sponsor and participant preferences for creating retirement income.

While almost 80% of plan sponsors said that they have provided communications and/or education to participants – specifically about turning retirement savings into a regular stream of income – just 38% of participants remembered receiving these types of communications. Instead, almost half of all boomers, Gen X and millennials stated they hadn’t received any communications on the topic.

The divide between plan sponsors and participants may be due to two factors:

1. Communications may be too general about the need to create retirement income, and doesn’t specifically discuss next steps, important considerations, and/or highlight the tools and resources available to help. Monthly income withdrawals are generally available in most plans and should be communicated as a retirement income solution and be communicated as such.

2. Specific communications may cover many topics (e.g., an email newsletter) with retirement income planning getting lost.

What do participants want?

Participants want specific information and education that’s applicable to their personal circumstance. Across all ages and income levels, the top three preferred topics were:

1. Determining how much money was safe to withdraw on a regular basis.

2. Estimating how much income their savings would create.

3. Strategies for turning their DC plan savings into income using the retirement income solutions available through the plan.

Almost all participants (96%) liked the idea of an automatic “nudge” as they approached retirement to remind them to focus on retirement income planning and consider the retirement income solutions available to them through the plan.

The clear takeaway for plan sponsors and fiduciaries is to communicate with participants about how the range of retirement income solutions work and the needs they fulfill – with a focus on how they can provide flexibility and/or reliability based on the use of the solutions, including combining them – in a manner that meets their individual needs and circumstances.

Beyond education: Offering access to discretionary advice

The Department of Labor (DOL) has historically said that education and information to help participants understand and decide among the retirement income options is not considered to be fiduciary advice.¹ In other words, where information and education are provided to enable participants to make informed decisions, plan sponsors will not be considered fiduciary advisers for that purpose. As a result, plan sponsors can work with their consultants and providers to develop participant-focused education programs to help them make informed decisions. Of course, committees should review and approve the communication and education materials to ensure they fairly explain the products and services.

However, for plan sponsors and committees who want to go beyond education, providing participants with access to discretionary investment management advice (through a managed account service) is possible. In fact, the DOL has issued helpful guidance in a Field Assistance Bulletin (FAB).²

• Where advice is given to participants, fiduciaries must engage in a prudent process to select and monitor the discretionary advice provider.
• If that standard is satisfied, plan sponsors and committee members will not be responsible for the discretionary advice given to participants.

This guidance provides a straightforward roadmap for the selection and monitoring of investment managers of participant accounts providing discretionary investment advice:

• Engage in an objective review process. The process should be designed to elicit information necessary to assess the advice provider’s qualifications, quality of services offered, and reasonableness of fees charged for the service. The process also must avoid self-dealing, conflicts of interest or other improper influence.
• Ongoing monitoring should reflect initial selection process. When monitoring participant-level investment managers offering discretionary advice, committees should review the initial selection process and consider whether:
  • The investment manager is complying with the terms of the agreements, whether there are valid participant complaints, and use of the service by participants.
  • Competitive costs (e.g., consultant or adviser fees) have generally become lower, and whether other services would better serve the needs of the participants.

As a best practice, plan sponsors should consider reviewing their current participant communications, education programs and/or access to discretionary advice, and – together with the plan’s consultant and providers – determine the best approach going forward to help address retirement income.

To learn more, download Fred’s retirement income legal and best practices checklist.