Making a DC plan's nest egg last a lifetime

The challenges and complexities of turning a lifetime of accumulations into a retirement paycheck

Sep 16, 2019 @ 12:01 am

By Evan Cooper

For defined-benefit plan participants, pieces of the retirement income puzzle fit into place relatively easily. Once a regular paycheck ends, components of retiree income for DB plan participants include Social Security, income from assets a participant may hold outside the plan — an IRA, other securities and investment real estate, for instance — and then, usually, the main income source: the pension benefit.

For defined-contribution participants, the puzzle pieces are similar, save for the substitution of DC assets for a DB pension. But determining how much in savings is necessary to generate sufficient retirement income and then actually converting DC plan assets that may have been accumulating over decades into a retirement paycheck is fraught with complexity.

“It can be daunting for many retirees to determine how much retirement income is 'enough,'” concludes a recent report by the Center for Retirement Initiatives at Georgetown University's McCourt School of Public Policy. “Deciding how much to save is difficult for participants because they do not know how long they will live or the quality of life they will have as they age.”

The CRI report notes that the complexity of assessing income needs and evaluating which solution will best meet those needs, along with the lag in innovation in administrative support for such solutions, and the uncertainty for plan sponsors created by existing legal and regulatory frameworks, continues to slow the adoption of lifetime income solutions.

Glenn Dial, a vice president and senior retirement strategist at American Century Investments, sees the problem firsthand.

“Most DC plan participants currently don't have much choice or flexibility in terms of retirement income,” he observed. “Some record keepers aren't income friendly. Up to half don't even allow monthly distributions, and some charge a fee. And if you look at products offered by record keepers for retirement income, there often are not a lot to choose from — maybe one or two, versus 10 or 20 on the accumulation side. They're only now beginning to look at retirement income.”

But plan sponsors are changing their views.

Core purpose of plan

According to a MetLife 2012 retirement industry poll, only 9% of employers agreed with the statement, “The primary focus of a defined-contribution plan is to serve as a source of retirement income.” By 2016, 85% of plan sponsors said income should be the core purpose of a DC plan.

How that income is delivered is the challenge. The CRI report outlines some of the more common lifetime income solutions for DC plan participants: an immediate annuity, a laddered bond portfolio, a target-date fund using a systematic withdrawal plan, a managed payout fund, a target-date fund combined with a deferred annuity, and an investment portfolio inside a variable annuity with a guaranteed minimum withdrawal benefit.

Given that participants can have different and sometimes conflicting objectives when considering retirement income — such as level of income desired, stability of income, longevity protection, liquidity, opportunities for growth, bequest considerations and degree of involvement required to execute their choices — plan sponsors and advisers should recognize that there is no “perfect” solution.

Instead, there is “a range of reasonable solutions and strategies plan sponsors can choose from for participants and beneficiaries,” the report states.

Annuity options

Sometimes, those solutions may include a type of annuity, which some advisers shun outright and which others shy away from for a variety of reasons, ranging from a lack of familiarity to a belief that they can provide a longevity solution through investments.

While Mr. Dial says his firm does not sell annuities, he said that advisers — some of whom “love insurance products” and some of whom “love noninsurance products” — should put aside their biases because many plan participants may need a mix of guaranteed and nonguaranteed products in retirement since “one solution won't solve the problem.”

Michael O'Connor, who heads MassMutual's institutional solutions defined-benefit business, said technology can help DC plan participants make better-informed choices.

“We serve the DC plans of about 80% of our DB plan clients, and we see that technology is becoming increasingly important,” Mr. O'Connor said. “Participants should have online access to their account, and information should be presented in a clear way, so they can understand their plan and its benefits. The more they understand and can learn on their own, the less they have to ask their human resources representative.”

Mr. Dial said that as important as technology is for being able to provide general information clearly, plan participants who are about 10 years away from retirement want to be able to talk to someone about their allocations, outside funds and retirement income choices.

“About 10 years ago I thought that just like auto-enrollment, the DC business might be able to create an 'auto-landing' that would make exiting the plan and distribution choices more automatic,” he said. “But it's much too complicated. People need advice.”

To support advisers who find themselves overwhelmed by the number of participants asking for advice, Mr. Dial said that American Century is one of a handful of mutual fund companies that still offers a call center of financial professionals who can provide one-on-one basic counseling to help participants with an investment strategy that can work to attain their retirement goals.

In addition to advice, plan sponsors are also supporting financial wellness and education programs intended to help participants understand a wide range of personal finance issues and make better decisions through the accumulation phase and into retirement. Some of these programs feature online tools that free up advisers' time and provide timely answers to participant questions. But one-on-one advice from a professional will probably remain most powerful.

“With our licensed specialist, we provide education for participants beyond investment issues related to their 401(k),” said Matt Cosgriff, wealth management group leader at BerganKDV Wealth Management in Minneapolis. “In the past, I think advisers as a group missed the boat by focusing only on the plan. While changing behavior is challenging, we have tried to put more emphasis on financial issues such as cash flow, budgeting and translating a 401(k) balance into a paycheck. Education is helping.”

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