Introduction
Public sector defined contribution plans play a critical role in providing retirement security for an increasing segment of state and local government employees. However, most public sector defined contribution (DC) plans do not have lifetime retirement income options that efficiently address longevity and investment risks to participants.
While individuals can purchase lifetime income options on their own upon retirement, very few plans offer an in-house lifetime retirement income product, which, if structured correctly, could provide a more cost-efficient and functional option for public employees.
This issue brief provides an analysis of how lifetime retirement income features are currently used in public sector defined contribution retirement plans and identifies the rationale for why providing these features is an advantageous policy.
It also outlines a best-practices framework for public sector DC plan sponsors to evaluate and select annuity options. The framework addresses the need for plan sponsors to order decision-making, focusing first on establishing retirement income objectives for the plan, next selecting a lifetime income structure to meet those objectives, and lastly selecting the most suitable product set based on the federal the Setting Every Community Up for Retirement Enhancement (SECURE) Act’s fiduciary safe harbor under the Employee Retirement Income Security Act of 1974 (ERISA) Section 404(e) for annuity contracts that provide guaranteed benefits for life to participants and beneficiaries in defined contribution plans.
This framework, which focuses on the primacy of setting retirement income objectives, represents a prudent approach to mitigating risks and aligns with public sector retirement benefit policy goals. The framework addresses common objections, compares product types, and provides a structured due diligence process to prioritize adequate lifetime income while considering costs, participant needs, and administrative feasibility.
By following this framework, sponsors can enhance participant outcomes, reduce longevity risk, and fulfill benefit policy objectives.
The framework outlined in Reason Foundation’s Personal Retirement Optimization Plan recommends that public sector defined contribution retirement plans prioritize lifetime income as a primary objective. However, the reality is that many of these plans do not offer lifetime retirement income as a form of distribution or do so in an inefficient manner, leaving retirees vulnerable to financial insecurity. The reasons for this vary, but primarily, it is because lifetime retirement income has never been prioritized as a core objective.
This brief directly addresses the reasons for not including lifetime income solutions in these plans and challenges misconceptions and objections. It establishes a foundation for understanding the necessity and value of annuities and offers a formalized approach for fiduciaries and administrators of public sector DC plans to evaluate and select appropriate and cost-effective lifetime income solutions.
Understanding the role of plan sponsors in designing a defined contribution plan’s retirement income features
State or local governments act as the creator, sponsor, and “settlor” of DC plans by establishing terms and benefit objectives through legislation. Fiduciaries and administrators are responsible for implementing—not designing—the plan as set by the sponsor. Often, sponsors fail to clearly define benefit objectives, leading plan administrators and fiduciaries to overlook lifetime retirement income features or use them ineffectively.
Through this framework, plan sponsors and fiduciaries will be able to:
• Assess the rationale for including lifetime income features, focusing on benefit policy objectives that prioritize the delivery of adequate lifetime retirement income;
• Respond to objections to including lifetime income features;
• Become informed about the different ways of including lifetime retirement income features in their plans;
• Compare lifetime income solutions against drawdown or distribution options without lifetime income features, such as managed withdrawals over life expectancy; and
• Implement a fiduciary process—both quantitative and qualitative—for selecting and monitoring lifetime income solutions that best align with established benefit policy objectives.
Using this framework, policymakers will enable the DC plan to fulfill its central objective: providing safe, secure lifetime income to participants in a cost-effective and risk-managed manner.
Although not directly applicable to governmental plans, the proposed evaluation and fiduciary process is designed to align with the requirements set forth in the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 and the Department of Labor (DOL) safe harbor standards under the ERISA Section 404(e) for lifetime income annuity products.
Full policy brief:
Adoption and evaluation of lifetime income products for public sector DC plans: A framework for policymakers and fiduciaries
Watch: Rod Crane and Zachary Christensen on how policymakers can implement this brief’s recommendations and the Personal Retirement Optimization Plan