Department of Labor is Focusing on the Rollout of a Lifetime Income Product for Retirement—What Does that Mean for You?

In 2007, I worked at a large multi-national asset management firm and was asked to attend an annual retirement industry event with the executives of every major retirement company in the United States. Held at the Harvard Club, the theme of the meeting was “idea day,” where retirement focused asset management firms shared thought leadership with their peers in order to beta test novel concepts and align the industry’s priorities for the coming years ahead. When a representative from a large insurer suggested a retirement investment solution that could be offered through traditional 401(k) and 403(b) plans which would focus on providing a lifetime of income—the crowd actually gasped.

What the executive was suggesting is that a participant should be able to invest in a 401(k)/403(b) investment option starting at the beginning of their career and continue to grow their funds within the same investment all the way through their retirement. As soon as it had been suggested, I remember thinking, “that is a genius business model.”

The problem he was trying to solve for was the fact that most qualified assets only stay within their respective mutual funds for about four years, which means investment firms, on average, have to build business models to drive revenue within a four-year window before those dollars transfer to another investment firm. Too many unanswerable questions immediately arose: What happens if a client switches record keepers? Is it portable? How much to pay out of projected income to run the product? And so on.

For over fifteen years, executives within the retirement recordkeeping industry have tried and tried again to design a lifetime income product that could provide a guaranteed monthly income to fill the retirement gap that had traditionally been provided for by pensions. Many Americans have little to no retirement savings at all. And even those with a healthy retirement savings struggle to figure out how much to withdraw in order to maintain quality of life throughout their retirement years.

At the Department of Labor (DOL) meeting in December of 2021, Kathleen Kennedy Townsend, a Special Assistant to the Secretary of Labor in Retirement, outlined the big-picture priorities of the DOL under the Biden administration—with helping plan sponsors to roll out an actionable lifetime income solution at the forefront. Fifteen years later, the industry has finally started to figure it out. Record keepers are changing how we relate to savings and what individuals can get/use. Eight to twelve of the big carriers have agreed to make these products portable with only a few big holdouts. And the products have been designed to transfer savings (income) later on, while lowering attached expenses. But questions still remain.

It is still unclear who, what, and how it will be implemented, particularly for the lower income savers who will need it most and may have moved often between jobs. The DOL is still considering a Social Security Bridge option that would allow retirees to use their savings before taking Social Security benefits or to purchase supplemental benefits to increase monthly payments. And there are still uncertainties around how much you can put in, if you can pick and switch investment risk, and whether there will be a return cap if the account does phenomenally well.

Until these and the other outstanding particulars are ironed out, I suggest tuning out the marketing noise and holding off on prematurely purchasing any offered products in the lifetime income sector for now. Though signs are positive and there is reason to be hopeful, I would guess that we are still 3-5 years before these products are truly accepted and understood in the marketplace.