Nuanced Advice Should Fill in the 401(k) Decumulation Weakness

According to the Cerulli report, low interest rates have made variable annuity products less attractive. The industry is in the early stages of a transition from guarantee-rich variable annuities (which it is struggling to sell) to a more diverse and more sustainable product set. This transition includes the introduction and reintroduction of fixed products designed explicitly for income purposes, most notability single premium immediate annuities and deferred income annuities (DIAs). With DIAs, investors turn over a lump sum to the insurance company with a guarantee of future income later.

Because investors make a trade-off of limited to no liquidity, the insurance company can invest the general account assets more aggressively, leading to a higher income stream. Income-oriented fixed annuities also present the advantage of not being subject to the enhanced disclosure requirements associated with the DOL’s Conflict of Interest rule, the report says.

Cerulli believes technology will ultimately play a role in income planning, particularly for lower-balance investors. While digital advice or “robo-advisers” came to the market purporting to disrupt traditional wealth management, their business models have quickly evolved. Cerulli finds that the vast majority of digital advice providers have a human component, in which an investor may speak with an adviser when opening an account. Still others have begun offering their technology to traditional wealth management firms as a way to serve clients in a scalable fashion. While these tools have largely been accumulation-oriented to date, it seems likely that they will ultimately develop income planning models, Cerulli predicts.

Wealth management firms that assist lower-balance investors with income planning could build a program that incorporates existing income planning tools, technology for scalable implementation, and telephonically based advisers to help with the necessary trade-offs in income planning, Cerulli says. Banks and insurance companies would be strong candidates for this type of service because they already serve numerous client relationships through multiple channels. Insurance companies in particular, who see their traditional broker/dealer business threatened by the DOL regulation, could use technology to evolve their consumer advice offering.

The Cerulli report also notes that despite a reputation for being less modern than its corporate counterpart, the 403(b) plan is significantly more advanced in one important way—its emphasis on creating a stream of income in retirement, in particular the use of annuity products. The significant presence of annuities within the 403(b) market is further underscored by the 56% of providers that make annuities available both within and outside of an employer-sponsored plan, and the 51% of 403(b) assets held in life insurance company products.

While the 401(k) industry has spent the past two decades training American savers to focus on asset accumulation, the 403(b) market was created with an eye toward providing a stream of income in retirement. Only in recent years have the 401(k) industry and related regulatory bodies begun to realize that there is a crucial “second act” to the 401(k) savings arc—specifically, “decumulation” or, in more plain terms, how to turn the proverbial pile of money an employee saves across a career into a sustainable paycheck in retirement, Cerulli notes.