Like any well-designed wedding cake, the best-designed retirement plans also come in tiers, according to a series of six brief white papers published last month by the Defined Contribution Institutional Investment Association, headquartered in Washington, D.C.

The series sets forth the concept of a retirement tier with a range of retirement products, solutions, tools and services, all of which allow a defined contribution plan sponsor to broaden the plan’s goal from one focused entirely on savings to a broader theme that also accommodates and supports participants nearing, entering or already in retirement.

The association’s white papers, which originated with its Retirement Income Committee, highlight a retirement tier’s potential components, explore its benefits and challenges, and provide a road map for implementation that reflects a diverse array of industry experts’ perspectives and insights.

Robert Austin of Alight Solutions, providing the series’s overview in Paper No. 1, underscored a retirement plan’s primary goal of retirement income adequacy. He noted that the 401(k) system is evolving from a blueprint for accumulating assets to one with strategies for preserving and consuming them.

"Plan sponsors' decisions about their plans' distribution policies can play a critical role in their participants' retirement outcomes," he wrote for the association.

In Paper No. 2, Vidya Rajappa of American Century said that a plan sponsor can adopt plan design, communication and investment choices that do not require separated participants to sign up for a lifelong, full commitment by instead designing a retirement tier that requires a more modest commitment by participants. 

“It is important to debunk a myth that sometimes arises within the industry that a retirement tier—or, indeed, any strategy to help retiring plan participants—is a stark, complex, or all-or-nothing proposition,” Rajappa said. “This myth is based on the fallacy that a DC plan must either help participants (and their spouses) all the way through retirement or force all terminated participants out of the plan at the first available opportunity.”

By adjusting plan documents, Rajappa said, participants can stay in the plan after retirement and take partial distributions. After amending the plan document to offer participants more flexible access to their savings plan, over time, plan sponsors could evaluate other alternatives.

Rajappa said that plan sponsors interested in offering a more detailed retirement tier could add retirement income options in-plan, as well as out-of-plan, such as institutionally priced annuities or other insurance-based strategies, just by integrating them into the qualified default investment alternatives.

In Paper No. 3, Kathleen Beichert of Benetic answers the rhetorical question, “Why now?” Her response: Because those approaching retirement need help.

“Retaining these participants’ assets, even after they retire, can assist DC plan sponsors in achieving and retaining plan economies of scale,” she said. “As a plan loses larger accounts, both its total size and the average size of its individual accounts decline. All else being equal, such losses work against securing lower record-keeping and investment management fees for all employees, whether active or separated.”

Beichert said it was vital to ensure that separating participants make appropriate decisions about how to handle their distributable plan assets since lump-sum distribution is irreversible; assets distributed from the plan lose plan fiduciary protections; and assets rolled into IRA accounts may result in higher fees.

In Paper No. 4, Toni Brown of Capital Group tells plan sponsors how to put all the components of a retirement tier into practice. She indicated that a good place for plan sponsors to start was by reviewing options and services that are currently part of their plan.

Once the plan sponsor has gathered data about the company’s current plan, such as by identifying products, tools and services offered by service providers, Brown said the next step in designing a retirement tier is to perform a gap analysis of additional options and services the plan sponsor would like to add to it.

Brown cautions plan sponsors to be mindful of one additional step they need to take.

“Lastly, as with all planning processes, once you have added a retirement tier to your plan, it would be prudent to periodically review its original objectives, to see that they are being met as effectively as possible,” she said.

In Paper No. 5, Elizabeth Heffernan of Fidelity Investments answers the question, “Are partial distributions for retirees right for your plan?” by weighing the pros and cons of such a tier feature.

According to Heffernan, as long as plan sponsors keep in mind the tier’s overall purpose—to help participants approaching or in retirement—there are no specific features that a retirement tier must include. In fact, she suggests that a plan sponsor consider creating an introductory retirement tier with retiree-focused components, such as education or advice, even if the plan requires full withdrawals.

Ultimately, Heffernan said, plan sponsors will have to weigh the pros and cons of allowing partial withdrawals and strategies encouraging retirees to stay in the plan based on the plan’s demographics and goals.

“It’s also worth noting that plan sponsors may wish to handle participants who terminate prior to retirement differently than those who separate due to retirement, as the latter may retain other benefit-related or retiree association connections to the firm,” she said.

In Paper No. 6, Drew Carrington of Franklin Templeton encourages plan sponsors to find out from plan providers what options, tools and services are available in designing a retirement tier. To this end, Carrington provides a sample e-mail request form that plan sponsors can fill out and e-mail to their plan providers.

In filling out the request form, he said that plan sponsors should advise the plan provider that the highlighted products, solutions, tools and services be of institutional quality; that they not create additional material risk exposure; and that they not require extensive integration or material redesign of existing programs or processes.

Just as important, Carrington said, plan sponsors need to ask the plan provider for their cost and the cost of their implementation; whether they are portable and transferable; and if they carry any associated fiduciary risk.

Carrington said that when giving the record-keeper a copy of the e-mail request to the plan provider, the plan sponsor should also ask the record-keeper for the “Money Out” report.

For copies of each of the association white papers in the series, visit https://dciia.org/page/RetirementTier.

The Defined Contribution Institutional Investment Association is a nonprofit founded in 2010 by a coalition of 42 industry firms dedicated to enhancing the retirement security of America’s workers.