Client Service September 13, 2016

PANC 2016: Income Options in Retirement Plans

Encouraging plan sponsors to think about the decumulation phase.
Reported by

Glenn Dial, head of U.S. Retirement Strategy at Allianz Global Investors, said common reasons cited by plan sponsors for not including retirement income products in their defined contribution (DC) plans include portability, technology and fiduciary liability issues. However, he told attendees at the 2016 PLANADVISER National Conference the bigger issue is that DC plans started as supplemental retirement plans and plan sponsors have been traditionally focused on selecting investments for their plans so participants can accumulate wealth.

Annuities in the past have been used in money purchase pension plans and 403(b) plans, so one would think these issues have been addressed, Dial noted. The government feels it has given plan sponsors what they want in the Internal Revenue Service (IRS) guidance about choosing annuity providers, but plan sponsors want a better safe harbor.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Donald Stone, director, DC Strategy and Product Development, and senior consultant at Pavilion Advisory Group, says there is a need for decumulation with target-date funds (TDFs) or managed accounts. Even though many of these products carry through retirement, they do not address the fact that participants do not know how to create a paycheck in retirement. Retirement income products would help, but with plan sponsors reluctant to use them, Stone encourages advisers to work with clients to allow for systematic withdrawals from their plans.

Timothy J. Pitney, senior director, Institutional Investment Strategist, TIAA, noted that retirement income options address longevity risk, market risk, interest rate risk and cognitive decline. “Participants want this; they have a genuine fear of running out of money,” he said.

He noted that 403(b)s have been using annuities for years, and though there are still portability issues, he believes these products will come back. TIAA is working on a solution to include retirement income options in TDFs, as well as an arrangement in using liability-driven investment strategies for DC plan participants.

Stone pointed out that there are a number of products available in the retail market, and all can be recordkept if recordkeepers would commit to programming their systems, but recordkeepers are reluctant to spend the money because they are not sure there is demand. “Advisers need to get plan sponsors focused on creating retirement income for participants,” he said. “They can introduce just one product, and add more as they become comfortable.”

Pitney said it is a behavioral game. It is hard to ask participants to separate themselves from their money.

NEXT: Getting retirement income solutions in DCs started

Dial believes TDFs are the starting point for introducing lifetime income options in DC plans. “There is a huge percentage of participants defaulted into TDFs,” he noted. “Today’s TDFs are trying to get participants the highest possible account balance, but they should take a different approach as participants near retirement.”

Stone said the struggle for advisers is when creating a investment lineup for retirement plan clients, not all tiers may be there. Recordkeepers can handle a do-it-for-me tier, a tier for those who want to select themselves, but with help, and a tier for those who want to do it all on their own—brokerage windows. “But, there needs to be another tier for pre-retirees to create lifetime income.”               

He reiterated that he suggests advisers convince plan sponsors to offer systematic withdrawals. “Talk to them about the workforce issues of participants not being able to retire as well as how keeping money in the plan can help them keep costs down with better bargaining power,” he told attendees. “This is one retirement income option we should be able to solve pretty quickly.

Asked if robo advisers can contribute in helping participants create a retirement income plan, Dial said it would be tough for robos to play a role in retirement income. He suggested that most employees of this new generation retiring with only a DC plan do not have an adviser, and they won’t go to a robo when they are getting ready to retire, because studies show that is one time people want to talk to an actual person.

However, Pitney said advisers can use robos in their practice to bring down the costs of running scenarios and providing advice.

Client Service September 13, 2016

PANC 2016: Industry Leaders in Conversation

Kicking off the second day of the PLANADVISER National Conference, two retirement plan thought leaders, with BlackRock and J.P. Morgan, discuss practical solutions to the most pressing plan issues.
Reported by

Speaking during the Industry Leaders in Conversation panel on the second day of the PLANADVISER National Conference, Sean Murray, managing director and head of adviser-sold and platform distribution for the U.S. Defined Contribution (DC) Group at BlackRock, pointed to three critically important numbers: 6.5, five and three.

“So, 6.5% is the return one has earned by being fully invested in a 60/40 portfolio in what I like to call the 401(k) time period, looking back roughly to the mid-1970s,” Murray explained. “And then 5% is what you would have gotten with this portfolio over the last 90 years. Finally, 3% is a number coming out of an actuarial survey—it’s what most investment expert actuaries think the next 20 years will return for a traditional 60/40.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Mike Miller, head of retirement distribution for U.S. funds management for J.P. Morgan Asset Management, agreed with those figures and concluded, “We simply have to force people to save more, given these numbers.”

For those reasons, the experts agreed, the use of automatic enrollment and automatic salary deferral escalation features probably represent the most powerful way for plan sponsors and advisers to support the real retirement outlook of participants.

“Related to this, asset-allocation solutions such as target-dates funds [TDFs] will remain hugely important,” Murray said. “Frankly, these solutions will have to get even better. Investors need different asset classes that will provide a broader range of return streams and opportunities. This is what the market is working to deliver right now.”

Both expert panelists encouraged advisers to “look for every source of alpha that you can, especially in this low-rate environment.” While this may result in more complexity behind the scenes, the panelists encouraged advisers to remember the wider trend of simplifying plan menus and factoring choice architecture considerations into their work.

NEXT: Lower costs across the board 

Several live-polling questions were fielded during the Industry Leaders in Conversation presentation, finding some impressive alignment of ideas around best practices among the advisers attending the PLANADVISER National Conference.

For example, the vast majority of advisers in the audience indicated they are working proactively to trim the investment menu, and that this work is being accepted and encouraged by plan sponsor clients. Another poll question found strong momentum across the board for pushing clients to lower-cost share classes and towards the consideration and use of collective investment trusts.

Miller noted that “we are definitely seeing a streamlining and real disruption of the traditional investment menu. We are clearly going back to trying to make it much easier for participants to make successful choices, and this is a great thing.”

Both experts agreed with the emerging them of utilizing a “three-tiered investment menu.”

“As a part of this, there is also a rethinking of how we label and present choices to plan participants,” Murray concluded. “At a very high level, we’re seeing a move away from a lineup of dozens of funds to a menu made up of the qualified default investment alternative [QDIA]—usually a target-date fund—along with a small second tier of white-labeled options, and then perhaps a third tier that is an open brokerage window.”

This three-tiered approach has been adopted by a variety of providers, they noted, and “most plan design consultants are selling this model today.”

In conclusion, Murray observed, “We have all seen the studies that show the performance gap between do-it-yourself investors and the people relying on a QDIA. This gap is going to keep growing and growing into the future as asset-allocation models continue to prove themselves. If the participant is not doing as well as the QDIA, why would you as a plan fiduciary allow him to continue down this path?” 

«