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Litigation Concerns Continue to Hamper 401(k) Plan Innovation

The threat of being sued continues to dominate plan sponsor reluctance of being too innovative with their defined contribution plans, a recent study finds.

According to Alight Solution’s 2019 Hot Topics in Retirement and Financial Wellbeing report, “Building on the past, working toward the future,” the percentage of employers citing the threat of lawsuits as a major factor hampering their innovation has tripled since last year.

More than 60% of employers say the threat of lawsuits hampers their innovation; this level is up from 53% of respondents who said the same in the firm’s 2018 study. Among these respondents in the 2019 study, 12% said the threat of lawsuits is a “major factor,” compared to only 4% in 2018.

This finding appears to be consistent with a 2018 paper by the Center for Retirement Research examining whether fear over various lawsuits being brought against 401(k) fiduciaries is preventing the use of “creative options” that may improve participant outcomes. 

Lifetime Income Options

At the same time, the study finds that more employers are adding various lifetime income options to their plans, but they continue to be reluctant to add in-plan annuity options.

“The fiduciary concerns about adding in-plan annuities to DC plans are part of a larger narrative for employers,” the report explains. “In today’s litigious times, employers are concerned that being too innovative increases their chances of being sued.”

And once again, “fiduciary concerns” is as a top barrier to adding in-plan income solutions, occupying the top spot in 2019, with 53% of respondents saying such concerns are a major reason for not adding an in-plan solution. Currently, only about 1 out of every 10 plans has an in-plan annuity option, the report notes.

Meanwhile, even though employers are still concerned with the operational concerns of administering an in-plan solution, the percentage citing that as a major barrier dropped from 46% to 40% in the 2019 study. Another major reason for not offering an in-plan option was waiting to see whether the market evolves more; this was cited by 45% of respondents.

While not cited in the report, a factor that could be holding back employers is whether Congress eventually provides a lifetime income safe harbor, which has received bipartisan support, but can’t seem to find its way to enactment. 

So what lifetime options are plans offering? Currently, most plan sponsors offer online modeling tools for individuals to estimate how much they can spend each year in retirement — this was cited by 76% of respondents who indicated they currently offer this feature, up 10% from the 2018 study.

Plan distribution options was the next highest lifetime feature, with 57% of responding organizations saying they allow participants to elect an automatic payment from the plan over an extended period of time.

This was followed by professional management (managed accounts) with a drawdown feature, such that the provider allocates participant assets for income and manages the annual amount paid from the plan. Forty-seven percent of respondents indicate they already offer this feature, with another 27% of companies saying they are either “very or moderately likely” to do so.

Alight’s comprehensive report is based on an annual survey the firm administers to employers in an effort to capture the changes they intend to make to their retirement and financial wellness plans in the year ahead. The 2019 version, which was administered in the fall of 2018, marks the 15th installment of the report and features the responses of nearly 175 organizations that employ 7.6 million workers.