Institutional vs. retail retirement income solutions

Low-cost, institutionally priced retirement income solutions have the potential to deliver higher retirement incomes than retail options.

Consider installment payments

Some participants use installment payments to receive their retirement income on a regular basis. If payments are modest enough, they may potentially last 20 or 30 years, but there's no guarantee of that.

When installment scenarios are run with retail funds (funds a typical person may invest in when he or she rolls an account to an IRA) versus institutional funds (funds in a retirement plan), the institutional funds lasted on average two to three years longer.1 The only difference between the retail fund and the institutional fund is the amount of the fee charged to the individual versus that charged to the plan. Employer bargaining power helps to drive lower fees.

Bar graph: using 4% rule with cost of living adjustment

This example uses modest 4% installment payments with a cost of living adjustment (COLA).

Fees can make a big difference

Institutional pricing provides more income for all products—both guaranteed and non-guaranteed.2  Nerdwallet ran a series of scenarios using different fee levels and found that when fees are lowered by .93% over a lifetime, a participant's balance may become significantly higher.3 Some scenarios showed a difference of several hundred thousand dollars.4

Line graph: institutional vs. retail over 40-year period

In one scenario, a participant choosing an option with fees that are .93% lower may save nearly $215,000 in fees over 40 years—and, with compounding, retire nearly $533,000 richer.5

Institutional options offer value

In general, when compared to retail options, low-cost institutional retirement income solutions have the potential to increase retirement income by 10% to 20%.6 Offering in-plan, guaranteed lifetime income solutions allows your clients to help participants benefit from institutionally-priced programs—and potentially higher incomes—throughout retirement.

Together, we can help plan sponsors with the administrative and communication responsibilities of in plan retirement income solutions. Learn more about our guaranteed income options or talk to us at 855‑533‑2170, to see how we can help your clients drive positive outcomes.

1 Vernon, Steve, F.S.A. "Institutionally Priced Retirement Income Solutions Deliver More Income." IRIC Update, Volume 5, Number 2, Institutional Retirement Income Council, http://iricouncil.org/wp-content/uploads/2018/03/Institutional_Priced_Retirement_Income_Solutions_Deliver_More_Income.pdf .

2 Melia, Robert. "Testimony of Robert Melia – Executive Director of the Institutional Retirement Income Council (IRIC) To the Advisory Council on Employee Welfare and Pension Benefit Plans Regarding Lifetime Income Solutions as a Qualified Default Investment Alternative (QDIA) — Focus on Decumulation and Rollovers." August 15, 2018. http://iricouncil.org/wp-content/uploads/2018/08/2018-07-23-iric-testimony-to-ERISA-advisory-council-clean_.pdf .

3 Yochim, Dayana and Jonathan Todd. "How a 1% Fee Could Cost Millennials $590,000 in Retirement Savings." NerdWallet, May 2016, https://www.nerdwallet.com/blog/investing/millennial-retirement-fees-one-percent-half-million-savings-impact/ .

4 Ibid.

5 Ibid. 

6 Dr. Pfau, Wade, et al. "Optimizing Retirement Income Solutions in Defined Contribution Retirement Plans.", Stanford Center on Longevity, May 2016, http://162.144.124.243/~longevl0/wp-content/uploads/2016/07/VleYvm-Optimizing_SCL_for_web_final.pdf .