HR’s Role in Delivering Lifetime Income

The Growing Focus on Lifetime Income

Across the retirement landscape, lifetime income is dominating the conversation. With escalating financial needs, evolving industry products, and growing interest from policymakers, employers are under increasing pressure to help employees convert their retirement savings into predictable, sustainable income.

How is your company thinking about lifetime income?

Why Lifetime Income Matters for HR Leaders

HR leaders are in a unique position to shape better retirement outcomes for employees. Their influence extends beyond plan design to include how benefits are communicated and understood. By educating employees and driving engagement, HR leaders help workers fully recognize the value of their retirement benefits.

When reviewing benefit strategies, HR leaders should consider:

• What messages do your benefits send employees?

• Are benefits optimized for short-term or long-term goals?

• Do they incentivize retention and align with organizational culture?

• Do employees feel supported in achieving retirement readiness?

The Challenges of Self-Managing Retirement

Many retirees currently self-manage their savings, often with limited financial guidance. This leads to uncertainty and reduced quality of life, as individuals struggle to make their savings last a lifetime.

Defined Contribution (DC) plans, like traditional 401(k)s, have attempted to address this through insurance-based lifetime income products. However, these options face significant challenges:

• Adverse selection: Few participants opt in, driving up insurance costs.

• High fees and expenses: Product development, marketing, and profit margins increase costs.

• Legal risk: DC plans remain frequent targets for litigation.

The result is high costs and low adoption, with most retirees self-managing their retirement and living far below their means.

Bridging the Gap with Market-Based Cash Balance Plans

Market-Based Cash Balance (MBCB) plans are a relatively new design that combines the benefits of traditional pensions and DC plans.

In an MBCB plan, employees earn benefits as a percentage of pay. The plan’s account value grows based on actual market returns, and upon retirement, the balance is effectively converted into a steady stream of lifetime income, much like a traditional pension.

Why MBCB Plans Stand Out

• Efficient and Low Risk: Lifetime income is the standard payout option, communicated clearly and delivered efficiently.

• Higher Lifetime Income: These plans can safely provide up to 30% more lifetime income than comparable DC-based solutions.

• Growing Popularity: Since 2018, 8 out of 10 new Defined Benefit (DB) plans have been cash balance plans. Of those plans, 60% are market-based.

MBCB plans offer several advantages, including retaining the tax advantages and guaranteed income features of DB plans while minimizing the funding volatility and risk that traditionally deterred employers.

Integrating Cash Balance and 401(k) Plans

The modern retirement system is moving toward flexible integration between employer-funded and employee-directed savings plans.

At retirement, participants can personalize their mix of lifetime income and flexible spending, aligning their financial outcomes with their individual needs and lifestyles.

Benefits for HR and Employers

Implementing a Market-Based Cash Balance plan offers several advantages:

1. Increase Plan Appreciation and Retirement Outcomes

• Improves understanding and perceived value of benefits

• Emphasizes income security and predictability

• Provides additional tax deferral opportunities

2. Incentivize Long-Term Service

• Supports retention through backloaded credits

• Enhances annuity options and medical savings through 401(h) integration

3. Support Recruitment and Equity Goals

• Differentiates your organization with a genuine “pension-like” benefit

• Reduces turnover and enhances loyalty

• Produces more equitable outcomes, particularly benefiting women, who historically face annuity pricing disadvantages

The Future of Lifetime Income

Defined Benefit plans are not disappearing. They are evolving. Modern designs like the Market-Based Cash Balance plan combine growth potential with guaranteed lifetime income, addressing both employer cost concerns and employee security needs.

For HR leaders, the opportunity is clear. By championing education, engagement, and innovative plan design, they can help employees achieve lifelong financial security while strengthening their organization’s culture and retention.

Better retirement outcomes are possible with affordable and practical strategies designed to meet the needs of today’s workforce. Looking to learn more about how a Cash Balance Plan might help your organization?

Schedule a quick call with our team today.

Frequently Asked Questions

1. How can HR teams ensure retirement benefits are communicated effectively and aligned with company culture?

Many organizations express care for their employees, but true commitment is demonstrated through meaningful investment in their future. Offering well-designed retirement plans reflects that commitment and reinforces a culture that values long-term employee well-being.

2. How can organizations support individuals who might outlive their retirement savings?

There are two main approaches:

1. Encouraging greater savings. Many tools already exist to help individuals save more, though their effectiveness has limits.

2. Helping individuals use their savings wisely. This is where our approach stands out, where we answer the question, “How can people not waste the money they’ve saved?” There are a few ways it gets wasted. The first is expensive products that have extensive fees that reduce value. Longevity is the other element, so maximizing the benefits people receive.

We encourage both saving sufficiently and managing those savings effectively.

3. How can we be sure the plan sponsor cannot declare bankruptcy and jeopardize the plan?

When properly designed and funded, these plans remain financially secure throughout their operation. If the sponsoring company were to declare bankruptcy, the plan’s assets would remain insulated. Additionally, the Pension Benefit Guaranty Corporation (PBGC) provides a layer of federal protection, acting as insurance for defined benefit (DB) plans if they are unable to meet promised benefits.

4. Are Market-Based Cash Balance (MBCB) plans portable?

Yes. The participant’s entitlement is portable. If an employee leaves the company, they may:

• Leave their balance in the plan until retirement, or

• In theory, smaller balances could also be rolled over into an IRA, or even another qualified pension plan

In either case, participants never lose the value they’ve earned.

5. Do recordkeepers currently offer MBCB plans? Can employers easily add one?

It’s not quite as simple as “turning it on.” Many recordkeepers already offer traditional Cash Balance plans, but daily-valued market-based versions are less common. But this is rapidly changing. A few providers, such as October Three, currently offer MBCB solutions, and availability is expected to grow exponentially.

Because of the complexity and regulatory nuances, organizations should consult experienced professionals to ensure proper implementation and compliance.

6. What are the disadvantages of retail annuities for women?

Women typically live longer than men, which can make retail annuities more expensive. Actuaries price this longevity risk into the product. Within a pension plan structure, however, this difference is neutralized. As a result, Market-Based Cash Balance plans can be especially advantageous for women on average.

7. Who manages the funds in a Cash Balance plan during an employee’s career?

The employer oversees the plan’s assets, which are typically managed by a professional asset management firm, often with input from an investment advisor.

Unlike a 401(k), participants do not choose their own investments. All assets are invested in a single, pooled strategy. This simplifies administration, supports long-term investment discipline, and allows for potentially stronger results due to the scale of the pooled fund.

8. Are contributions made by the employer, the employee, or both? Are pre-tax and post-tax options available?

This is a part of why we discussed the two-part plan structure. The cash balance specifically is generally employer-funded only, and it’s pre-tax. When you pair that with a 401(k), it’s an opportunity to let employees contribute. We recommend having a match here as well to incentivize employee savings. In the 401(k), you also have the opportunity for Roth contributions, giving participants the option for pre-tax and post-tax contributions.

9. If offered to employees, is the plan subject to an annual audit, non-discrimination testing, and IRS contribution limits?

Yes, on all counts.

Cash Balance plans operate within the defined benefit (DB) legal framework, which means they are subject to the same regulatory and compliance requirements. Fortunately, their design often makes meeting these requirements simpler than with traditional pension plans.

However, if an existing DB plan is modified to include a Cash Balance component, the structure can become more complex, making expert guidance even more important.