Lifetime Income Fees vs. Costs: Look Beneath the Tip of the Iceberg

Lifetime income solutions are high on the wish lists of defined contribution (DC) plan participants, with the certainty of a guaranteed lifetime income stream ranking as the top feature in our surveys over the past decade. More than half of DC plan sponsors want such a solution, too.

The SECURE Act has made plan sponsors more comfortable as fiduciaries in taking action to evaluate and implement lifetime income solutions. But with many options to choose from, plan sponsors need to evaluate a wide range of choices—each with its own structure, benefits and costs.

Assessing Costs: Looking Beneath the Surface

Whether it’s a managed-drawdown option, immediate annuity, deferred fixed annuity, qualified longevity annuity contract (QLAC) or guaranteed lifetime withdrawal benefit (GLWB), each plan sponsor must choose the option that provides the best value to participants. To make that determination, the sponsor must assess benefits versus explicit fees and implicit costs—from the individual participant’s perspective.

What’s the difference between explicit fees and implicit costs?

An explicit fee is a stated charge to a participant…like an expense ratio for an investment option. Implicit costs aren’t listed like stated fees—they’re inherent costs stemming from the way a solution is designed. For example, one implicit cost is forgoing long-term growth potential when surrendering assets to buy a fixed annuity. Another implicit cost is the spread: the difference between what an insurer earns on assets that participants surrender up front and the lower amount the insurer pays to the participant in guaranteed income.

So, the total cost of lifetime income solutions can look like an iceberg: some costs are explicitly visible above the surface, but what’s under the water matters, too. Because the SECURE Act requires plan sponsors to prudently evaluate the costs and benefits of lifetime income solutions, it’s critical to accurately measure all costs—and resources are available to help.