Why Lincoln’s PathBuilder Matters for Retirement Plans

By Manoj Upreti and Dennis Gallant

 

On July 15, 2020, Lincoln Financial Group announced the launch of PathBuilder, which can be selected like any other investment option within employer-sponsored retirement plans and provides a guaranteed income stream for life.

Why is this product announcement important?

Many U.S. consumers today are worried about outliving their retirement savings. While many people save in retirement plans such as the 401(k) or the IRA, it is hard to understand how those savings would translate into a monthly income.

This product makes an employer’s defined contribution plan work like a defined benefit plan, presenting a better picture of monthly retirement income coming out of retirement savings.

This option is made possible by the SECURE Act, passed by Congress in December 2019, which allows lifetime income to be distributed from workplace retirement plans.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act includes three major provisions that encourage the use of lifetime income in retirement plans and that reduce some of the barriers that have traditionally discouraged employers from adopting in-plan annuities. The provisions can be summarized as follows: (1) requirement to provide a lifetime income disclosure to plan participants, (2) “new safe harbor,” which lowers employers’ liability, and (3) portability of lifetime income benefits, which makes it easy to switch between recordkeeping platforms or roll over to an IRA.

While in-plan annuity products are currently available to employers—a Department of Labor ruling in 2008 made that possible—only about 10% of employers use those. This is mainly because employers are worried about their fiduciary liability associated with selecting the right annuity, checking riders and fees, and vetting the insurance company. Additional effort and complexity are also associated with explaining annuities to participants and supporting them.

Lincoln’s product leverages the SECURE Act’s new safe harbor provision to provide employers with a written representation of compliance, shifting the liability to the insurer.

The COVID-19 pandemic has shown market volatility and investment risk to be real and unexpected. That has made people near retirement very worried. Lincoln’s product promises a guaranteed annual income using an income base that never goes down, even when the market drops, and that can go up annually if the market goes up.

How does Lincoln’s product work?

The product is similar to a target-date portfolio, which many people already understand. In one scenario, prior to a participant reaching age 55, it operates like a typical target-date portfolio. Starting when the participant is 55, allocations into the PathBuilder income investment option begin—10% of the portfolio every year for 10 years—becoming 100% invested and generating lifetime income when the participant reaches 65.

The product is essentially a group variable annuity with a guaranteed withdrawal benefit option. Guaranteed annual income can be 4% to 6% of income base depending on the age of the participant.

In one example, an individual with US$500,000 in the plan at age 65 will get US$1,875 per month for life, using the 4.5% guaranteed rate (US$500,000 at 4.5% over 12 months).

Lincoln has taken a good initiative, but other carriers have an opportunity to expand on the idea.

Lincoln’s product will help plan participants transition from accumulation and retirement savings to decumulation and retirement income. The solution will also raise awareness of retirement income planning and engage participants earlier. While Lincoln’s product is the first one to implement the flexibility offered by the SECURE Act, with 10,000 baby boomers retiring every day over the next 10 years and a growing need to address investor longevity and market risk, it is expected that many insurers would sense the opportunity. We might see more such products available to employers in the future. For example, BlackRock announced in May that it is incorporating annuities from Brighthouse Financial and Equitable in target date funds.

Employee education for in-plan lifetime income products will be an important piece of the puzzle if employers want to see adoption. Many employees would wish to speak to a financial professional before making a decision, and employers/carriers should facilitate such conversations.

Since many people could have retirement savings in multiple places outside of the current employer 401(k) plan, insurers could build tools to encourage aggregation and consolidation of client assets. These tools are critical to providing a holistic view and delivering an effective retirement income plan, and they improve the investor’s overall financial wellness.

This announcement is a good start down this path, but improving participant retirement-saving and income-planning outcomes will require more solutions, education, and work among plan sponsors, participants, and plan providers.

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