The Markets September 30, 2015

PANC 2015: Retirement Income Options

A vast majority of individuals say they are open to the idea of in-plan lifetime income options, but only about one in five DC plan sponsors say they’re interested in these features. 
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An informed group of panelists discussed the latest retirement income planning trends in the defined contribution retirement space during the second day of the PLANADVISER National Conference in Orlando.

Panel moderator Jeb Graham, retirement plan consultant and partner at CapTrust Financial Advisors, asked the audience to supply a few numbers for the conversation. A quick poll showed just a handful of retirement specialist advisers in the audience “are aggressive about offering in-plan retirement income options to participants,” and even fewer felt their plan sponsors clients would be open to wider in-plan income use.

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Panelist Jan Gundersen, managing director for product management at TIAA-CREF, suggested this is because DC plan sponsors have “traditionally only thought about accumulation—nest egg thinking.”

“Today we are clearly seeing a demographic shift and so many people are looking for guidance on how to spend money in retirement, participants especially,” Gundersen said. “For this to really take off we will need more plan sponsor interest, and that will only come when solutions become easier to understand, and they must fit with plan sponsor’s fiduciary role.”

Panelist Glenn Dial, head of retirement strategy for Allianz Global Investors, agreed with that sentiment, but also warned advisers not to dismiss in-plan income for DC clients. Portability challenges are very real, he said, but they can be addressed by skilled advisers and investment providers. 

“It’s not very popular today, that’s true,” Dial said, “but to get a sense for the pent up demand that is out there, it helps to look backwards and consider the appetite for and usage of in-plan income during the earlier defined benefit [DB] paradigm. It was 100%. Everyone in the DB plan got guaranteed income for the rest of their life, and most people were just fine with that. I think the interest is clearly still there.”

Michael Gordon, another panelist and head of retirement insurance and the Strategic Solutions Group at BNY Mellon Investment, agreed. He urged advisers to be stronger advocates for in-plan annuitization and other controlled withdrawal strategies drawing from the DB approach.

“We used to look at 4% as a safe annualized withdraw rate for those people who wanted to control their own spending and who resisted annuitization—that meant you could spend each year $30,000 or $40,000 of every million dollars saved,” Gordon said. If you look at it this way, annuitizing a million dollars can be a pretty good deal when you consider the added guarantee. “It will also depend somewhat on the market and interest rate conditions when the annuity in transacted, of course.”

NEXT: More DOL guidance is unlikely

Gordon said he looks forward to more innovative in-plan income solutions that can take into account DC plan participants’ home equity and other outside assets, because “any realistic solution here is going to have to account for both in-plan and out-of-plan assets. There are trillions of dollars outside DC plans that we can help people control and spend effectively.”

As Dial explained, part of the low pickup problem for in-plan income is regulatory: most plan sponsors cite fears of fiduciary liability and uncertainty around how to pick and monitor annuity providers. But this doesn’t mean advisers should wait for the Department of Labor (DOL) to unveil a new in-plan income safe harbor before they start advocating for more DC plan income options.

“When I talk to DOL and Treasury—they’re surprised that we have cold feet on advocating for in-plan income and that sponsors feel they don’t already have the fiduciary protections they need,” Dial said. “They think that gave us a safe harbor already, and indeed they did. They want to know, what else do you think you need? They think they have given enough clarification and guidance.”

Gundersen concluded the panel by observing “there is no single problem in distribution the same way there is in the accumulation phase.” On the accumulation phase, advisers can solve problems for many people at the same time, for example through auto-enrollment and auto-escalation.

“But with DC plan asset distribution the risks are very different for different individuals,” he said. “Individuals’ priorities and preferences matter so much more on the spending side. How much of your income do you want to come from guaranteed sources? How much risk are you willing to carry for potentially more purchasing power later? These are all very personal situations, so the one-size-fits-all answer ‘save more’ is not going to apply.” 

In Practice September 30, 2015

PANC 2015: DC in Perspective

Advisers play a vital role in helping plan sponsors navigate the changing retirement landscape.
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Plan advisers are the linchpin in the constantly evolving retirement landscape, said Anne Lester, portfolio manager and head of retirement solutions, J.P. Morgan Asset Management, and keynote speaker on Tuesday at the 2015 PLANADVISER National Conference in Orlando, Florida.

From bettering outcomes to dealing with changing regulations, every decision will be easier to make, Lester said, every question easier to answer if the adviser asks: is what I’m doing going to increase the probability that someone will get to retirement safely? “Every choice we face is going to be clearer in that context,” she said.

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The current retirement landscape has several notable features, according to Lester. Government is increasingly interested in seeing people retire with adequate resources; plan sponsors motivated by business risk management also want to do the right thing for employees; and demographic shifts are adding to financial market anxieties. All of these factors mean the role of the adviser is ever more important.

Lester called the daily work of advisers essential to shifting participant outcomes and supporting plan sponsors. “Helping employers to navigate and understand the landscape is an important and powerful job,” she said.

“We’re struggling to understand living longer,” she said, “and it’s key to help plan sponsors understand this. As we live longer, are our financial assets lining up behind that?” Although the Boomers have accumulated substantial wealth, Lester noted, their average individual net worth—about $200,000—is mostly in such illiquid assets as residential properties, other nonfinancial assets and pooled investment funds. “This generation’s liquid assets may not be enough to meet their consumption in retirement,” she said.

Individuals face a range of multifaceted risks, some of which they can control and some they cannot. For example, individuals have it in their own power to decide that they’re going to save for retirement, a preset for participant user risk.

NEXT: A range of risks and tactics to meet them

Accumulation risk is determined by the amount someone saves. Individuals saving at 8%, with a company match of 4%, are probably on track to meet their retirement goals. User risk—whether an individual allocates assets properly and assumes the right level of risk—is another measure, and most people, Lester said, don’t even understand how much risk is right for them.

If they disengage from the plan when the markets are rocky or panic when they open their statements and sell, Lester said, these sub-optimal behaviors can be mitigated with auto features.

Market risk can come in several varieties, Lester said, from garden variety volatility to cataclysmic events like the Great Depression or the crash of 2008. “Most people have only experienced falling interest rates,” Lester pointed out, but rising rate risk still exists. Inflation might return in the future, and longevity risk, which individuals can control to some extent with diet and exercise, is another factor ultimately beyond control.

A slew of changes on the horizon, among them money market fund regulation and the Department of Labor’s proposed definition of fiduciary, means the regulatory environment is constantly in flux. Another challenge: the lower-return environment. Though a 60/40 portfolio returned 7% in 2014, Lester said, this year that same portfolio is likely to yield 75 to 80 basis points less.

To address these challenges, the retirement industry can turn to several tactics, Lester said. Auto features can help ensure people save for retirement and escalate contributions even beyond 6%. Adviser fees must generate value, and fees in general need scrutiny. However, she noted, fees are not a solitary factor. Passive management, which can make sense in a portfolio, is not always the answer, Lester said, “not always the straightest path to success.”

Ways to measure if a plan is helping participants achieve successful outcomes are participation rates, (which can be met with auto enrollment), adequate savings levels (Lester recommends auto escalation increases beyond 6%) and the use of target-date funds (TDFs) to ensure that participants allocate appropriately. The need for income, she said, will necessitate a thoughtful withdrawal strategy.

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