PANC 2016: Income Options in Retirement Plans

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.

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.

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.