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Accumulation Takes Back Seat

The retirement plan industry changes its focus to retirement income

Plan advisers and plan sponsors now want to be able to tell participants how accumulated assets in their 401(k) plan translate into income they can live on in retirement, says Jamie Ohl, president of tax-exempt markets for ING U.S. Retirement in Hartford, Connecticut.

A pilot program by ING U.S. provides holistic advice and guidance to plan sponsors and participants. Tools and resources allow a participant to pull everything together for a personalized, integrated financial picture that will take the individual to and through retirement. The program is partly the result of several years of surveys that ING U.S. conducted with plan sponsors, who said the sole focus on accumulation failed to resonate with employees as retirement readiness.

“Participants want to know how to convert that pot of assets into retirement income, and they want to know what they will need, to retire on,” Ohl says.

Chip Castile, managing director and head of the U.S. retirement group at BlackRock, in New York, says a frequent question of plan sponsors is, how much do participants need to save to get the outcome they want?

Last year, BlackRock introduced the CoRI indexes, which enable pre-retirees to quickly estimate the annual lifetime income their current savings may generate once they turn 65. The investment manager just brought out five CoRI mutual funds that invest in fixed-income securities and seek to provide the results that correspond to the total return of the CoRI indexes.

“There’s a range of uncertainty around how to generate retirement income,” Castile says. The CoRi indexes and funds are a way of taking a very complex global retirement crisis and making it digestible to the average individual, he says.

The emphasis is on building retirement readiness via a combination of tools and capabilities delivered to the employee in a form that is most convenient and usable to that individual. Every possible way to interact with a participant—by phone, on the Web, on a smartphone, with Google and Apple devices, or in person—is employed.

The usable format is crucial, Ohl says, and Millennials may need a different communication method than pre-retirees.

Ohl says she is nearly positive her 22-year-old nephew’s cell phone is surgically attached to his hand. “He doesn’t respond to phone or email, but if he gets [a] text, he answers immediately,” she says. The way to reach these participants is by making information accessible through mobile devices and smartphones.

A majority of participants (70%) in ING U.S.’s pilot program take positive action. Ohl says the firm did not go into the test program with a specific target but knew that personalizing advice would give it a high response rate. “We were pleased,” Ohl says, “and we think we can get it to 80% or 90%.”

—Jill Cornfield

Couples Disagree

Many have different lifestyle expectations about retirement

More than one-third of couples disagree over matters related to money in general and retirement in particular, a recent study finds.

Fidelity Investments’ “Couples Retirement Study” reports that approximately four in 10 working couples (38%) disagree about the lifestyle they expect to lead in retirement. In addition, the study shows that more than half (51%) of couples admit to arguing either frequently or occasionally about money, with 38% never resolving things in a mutually agreeable way.

Even if couples rarely fight about money, the study found that they do not necessarily agree on financial priorities. In more than one-third (36%) of couples, one spouse does not know where important household financial and legal papers are kept, and approximately one-third disagree as to who is the primary beneficiary on their life insurance policies (31%) and retirement accounts (27%).

The study findings also reveal confusion when it comes to retirement matters—32% of non-retired couples disagree on the role employment will play in retirement, and 38% have no plan in place to manage rising health care costs in retirement or were unaware they needed one.

“The fact that many couples disagree about money isn’t surprising, but the realization that so many don’t actually resolve their financial squabbles is cause for concern,” says Lauren Brouhard, senior vice president of retirement at Fidelity in Boston. “When it comes to making your relationship a financial ‘affair to remember,’ even the closest of couples have opportunities to get more on the same page. Just as you plan for everything else in life, it’s important to make financial planning a regular part of your conversations.”

With regard to financial planning, Fidelity recommends that couples ask each other:

• Are you truly equal partners when it comes to handling the finances? Even if one person has assumed the role of family financial planner, it is important that both are prepared to take over as “family CFO [chief financial officer]” if necessary;
• Do you both have a handle on the life insurance policies and brokerage accounts? Make sure you both know who the beneficiaries are on each, because there are legal implications if beneficiaries are not assigned. Discuss what retirement, savings and insurance plans are in place, and where important documents are kept. This can help prevent family squabbles and unnecessary tax penalties in the years ahead; and
• Are you jointly maximizing your savings potential? Make sure each partner, if eligible, contributes to tax-advantaged savings accounts, such as your company’s workplace savings plan or an individual retirement account (IRA). Ensure that your joint assets are allocated properly. Establishing and maintaining an age-appropriate asset allocation that adjusts over time is critical to savings success.

Do you have a shared vision for what your retirement might look like? Many couples do not. Are you looking to travel the globe, or simply to tend the garden at home? Talk it over.

—Kevin McGuinness

Come On, Advisers, Look at Your Own Future

Very few advisers have a succession plan

If you knew you would not wake up tomorrow, a report asks, how confident would you feel about the future of your firm? Ron Carson, founder and CEO of Carson Wealth Management Group, in Phoenix, poses this question in “The Cobbler’s Children Have No Shoes: Don’t Put Off Planning Your Succession.” Just 7% of wealth management firms have an actionable succession plan in place, should the firm’s principal become incapacitated, the report finds.

The report, a case study on the succession planning crisis facing the advisory community, was released by the Alliance for Registered Investment Advisors (aRIA), a research study group composed of six registered investment adviser (RIA) firms.

It is an uncomfortable topic for many advisers, Carson observes, noting that some even falsely claim to have a succession plan. “They want to do the right thing but don’t think about the ramifications for their clients when they don’t,” he says.

An adviser’s untimely death can significantly disrupt a firm with no succession plan in place. The principal without such a plan takes on a systemic business risk, says John Furey, principal of Advisor Growth Strategies LLC in Omaha, Nebraska, and a managing member of aRIA. “Any adviser looking at it rationally would have to agree,” he says. Yet, leaving a firm can feel very distant to them. “The trouble is not in front of them today,” he says.

A Plan for Planners

Those advisers who claim to have a plan often have, instead, a vague verbal agreement citing what they would like to happen, says Carson. The report highlights the irony of advisers extending themselves to ensure the continuity of client services in case of a disaster yet neglecting the same diligence to plan for inevitably separating from their own firms.

The need to hold to a fiduciary standard can break through reluctance, Carson says. Advisers are brought up short when they realize they could be putting their clients at risk.

What happens to the clients is not talked about enough, Furey agrees. Consumers and investors are at risk if left stranded with no continuity or planning after what could be a 20-year relationship.

The white paper outlines key issues for implementing an effective succession arrangement, including a detailed 15-point checklist for advisers to complete to get started. Carson believes that regulatory bodies need to compel advisers to have comprehensive, actionable succession plans in place.

“I think we’ll be having the same conversation 20 years from now unless it is regulated,” Carson says. The Financial Industry Regulatory Authority (FINRA) requires brokers to have a business continuity plan (BCP) for temporary emergencies, but there is a greater chance of someone dying than an office being wiped out by a tornado. The Securities and Exchange Commission (SEC) could require that a succession plan be disclosed on brokers’ Form ADV, he suggests.

Regulation could be on the horizon. Furey says an industry representative asked him if he would appear on Capitol Hill at a hearing to discuss the need to require such preparations.

Reality Bites

The report includes case studies that demonstrate how Carson’s firm helped two different advisers who needed a succession plan. Scott Ford, an adviser with $300 million of assets under advisement (AUA), from Maryland, and Nancy K. Caton, a San Francisco-based adviser with $250 million of AUA, both created succession plans.

It is impossible for advisers who hold themselves up as fiduciaries to fulfill their responsibilities if, upon their death or disability, their business falls apart, the report says. In that case, clients who placed their trust in the firm are left to pick up the pieces.

“I ask advisers to look in the mirror and ask themselves just one simple question: ‘If you went to sleep tonight and didn’t wake up, would you entrust your firm with the ongoing management of your family’s wealth?’” Carson says. “If the answer isn’t an immediate and resounding yes, then you have important work to do.”

One critical reason for such a plan—one demonstrating its importance—is that the valuation of a business having a detailed succession procedure in place is significantly higher, the study says.

“If [the study] convinces one person, it will be worth it, but hopefully it will convince more,” Carson says. The paper is available free of charge on the aRIA website, at www.allianceforrias.com.

—Jill Cornfield

Participants Seek Guarantees

Investors increasingly want a financially secure retirement

More than one-third (34%) of respondents to a survey by TIAA-CREF view the generation of guaranteed monthly income as the main goal of their retirement plan. Another 40% of participants want to ensure their savings are safe regardless of what happens in the financial markets. Yet 72% either do not have a retirement income option in their defined contribution (DC) retirement plan or are unaware of whether their retirement plan has one.

In terms of potentially running out of money in retirement, 20% of participants are somewhat concerned and 24% are very concerned. But just 21% expect to receive income from annuities.

Fifty-three percent of participants plan to use savings withdrawals as one of their sources of monthly retirement income. Yet, TIAA-CREF research shows, if retirees make the same-size withdrawals from retirement savings that they would receive in income payments from a lifetime annuity (assuming the same interest rate), they would have more than a 50% chance of outliving their savings. Annuity payments, however, would continue for as long as the retiree lives.

“All workers deserve a secure retirement, but many need help in setting realistic plans to achieve that goal,” explains Teresa Hassara, executive vice president of TIAA-CREF’s institutional business, in New York. “With life expectancies increasing rapidly, lifetime income options are essential to sustaining financial well-being over a retirement that could last for 30 or 40 years. Plan sponsors play a key role in educating employees on the value of these options.”

Most experts agree Americans will need 70% to 90% of their pre-retirement income to maintain their standard of living in retirement, according to Hassara. Yet one-third (33%) of surveyed participants who have yet to retire believe they will need only 25% to 50% of pre-retirement income, and another 33% believe they will need 50% to 75%. Only one-fifth (21%) of those surveyed believe they will need more than 75% of their pre-retirement income to live comfortably in retirement.

Experts also recommend saving at least 10% to 15% of salary for retirement annually, TIAA-CREF notes. However, the survey found that 44% of those not yet retired save 10% or less of their annual income. Another 21% fail to save for retirement at all.

“The survey shows that most Americans underestimate the amount of retirement income they will need,” Hassara says. “But a bigger concern is that more than one-fifth of Americans are not saving at all for retirement, and many more are not saving enough.”

“These findings seem to affirm what we’ve heard anecdotally—that there is a disconnect between what participants say they want and what they actually do regarding retirement,” says Tim Walsh, managing director of investment services at TIAA-CREF. “It also reveals the lack of focus on what the true objective of a retirement plan is. When plan sponsors are asked whether the goal is to accumulate maximum wealth or provide participants with monthly retirement income, many are hard-pressed to answer.”

Walsh, who works out of Waltham, Massachusetts, observes that despite the popularity of defined contribution plans as a retirement vehicle, the survey results seem to signal a nostalgia for the kind of retirement benefits produced by defined benefit (DB) pensions. He recommends that plan sponsors use plan management and design to help participants. He notes that inclusion of lifetime income projections on quarterly participant statements, as well as the use of automatic plan features, can help.

KRC Research conducted the survey by phone among a national, random sample of 1,017 adults, ages 18 and older.

—Kevin McGuinness