Did you know that seemingly small differentials in the price points at which investments, annuities and other elements of retirement income strategies can be delivered from within a Defined Contribution (DC) plan can, for certain retirement plan participants, add up over the course of a lengthy retirement to several hundred thousand dollars of additional income, relative to income solutions offered at retail price points?
According to a white paper recently released by the Institutional Retirement Income Council (IRIC), self-directed participants in employer-sponsored retirement plans can, in many cases, generate more income and/or higher asset balances by using products and programs offered within their defined-contribution plan than they can by rolling those assets over to a retail account within an IRA.
Specifically, IRIC estimates the accumulated balance and retirement income of a hypothetical, middle-income participant that remained in her DC plan for both investment services and retirement income services for her entire life, relative to what that participant might have experienced if she had rolled her accumulated balance to an IRA at retirement. The participant in this hypothetical case was able to accumulate about $1 million at retirement by saving consistently from age 23 through age 65.
IRIC reviewed the income this participant would receive through age 95 from in-plan investment relative to investments with a retail fee structure under an IRA under three different income approaches:
Estimating the additional income and additional remaining balance using withdrawals through 95 under the IRS required minimum withdrawal table
Estimating the additional income and additional remaining balance at 95 using institutional versions of guaranteed minimum withdrawal benefits (GMWBs)
Estimating the additional income through 95 when using institutional immediate and deferred immediate annuities
In the first scenario using IRS required minimum withdrawal tables, the 401(k) participant received between $268,000 and $798,000 of additional income through age 95, depending on the assumed level of investment fee cost advantage received by the participant’s DC plan.
In the second scenario using GMWBs, the results are equally astounding. The participant received an estimated additional income of $225,000 and an additional remaining account balance at age 95 of $607,000. As such, the nominal incremental benefit of remaining invested in plan totaled $832,000.
In the third scenario using fixed income annuities, the participant received between $82,000 to $164,000 in additional income through 95.
Plan sponsors and participants do not always realize that although institutionally-negotiated investment fee cost savings negotiated by plan sponsors on behalf of participants might seem like a small percentage of total costs, they can add up to very significant amounts of additional income and retirement assets for participants. Employers that want to increase the retirement readiness of their workforce should review this study and consider adding retirement income solutions to their DC plans.
Michelle Richter is the executive director of the Institutional Retirement Income Council, a nonprofit, membership-based organization of retirement industry advisers. Bob Melia is the former executive director of the Institutional Retirement Income Council, and now serves as an adviser to the group.