Ed Moslander & Ben Lewis

Ed Moslander, Senior managing director at TIAA-CREF

PA: Why is there such a big focus today on income in retirement plans?

Ed Moslander: I think there are several reasons. One is that, for most of America’s retirement plan history, people got their retirement income from defined benefit [DB] pensions. We all know that coverage has declined over the years. A whole new generation of employees is going to have its retirement income provided through defined contribution [DC] plans. And with that comes uncertainty about the level of income those plans will provide.

The second reason is uncertainty about Social Security. And the third is longevity—people are living longer. If you hit 65, there’s a better than 50% chance that you’ll hit 87, 88 years old. And if you’re a married couple that hits 65, there’s a 75% chance that one of you will live to age 90.

PA: Do you see income-focused solutions becoming more of a factor with QDIAs [qualified default investment alternatives] and defaults?

Moslander: We think they should be. They’d solve one of the great criticisms of defined contribution plans. What’s the aim of those plans? To create as big an account balance as possible. But we haven’t thought much about income adequacy.

PA: What are some of the basic changes that plan sponsors should consider to keep income the central focus?

Moslander: The first thing that plan sponsors and consultants need to do is measure the effectiveness of their retirement plan by how much income it’s going to replace. Make it an outcome-based measurement of success rather than an input measure of success.

Then we should structure default alternatives so they make income the goal for every employee in the plan. Measure at the plan level—replacement ratios and income/outcomes—and then at the individual level, similarly.

Thirdly, think about how you manage assets against an income risk versus an accumulation risk. It’s not going to be the same sort of investments. You might go into Treasurys or short bonds if you’re really trying to keep an accumulation safe, but if you’re trying to keep someone’s income safe, you really want something that reflects changes in interest rates. That’ll be the main driver of retirement income, and that might be something such as a Treasury Inflation Protected Security (TIPS), for example.

PA: What specifically is TIAA-CREF doing to make income the ultimate focus, for the outcome?

Moslander: We started with an index that we produced, the Retirement Income Index, where, at the plan sponsor level, we calculate retirement readiness based on the average replacement ratio of the employees.Secondly, we show each participant individually where he/she stands from an income-replacement perspective. Thirdly, we bring the liability-driven investment [LDI] methodology in a QDIA solution to the marketplace. We’re very excited about this. Again, while it’s no guarantee of a particular level of income, it helps people think about income as the goal and then manage their savings rates, how long they’re going to contribute, what their funding ratio is, and always be looking at how close they are to meeting their income goal. 

Ben Lewis, Senior managing director institutional relationships at TIAA CREF

PA: What are the key challenges facing the small plans in the not-for-profit market segment?

Ben Lewis: At the small nonprofits we work with, the plan sponsors typically are generalists, so they’re acting as the chief financial officer [CFO], the chief human resource officer [CHRO], the chief risk officer [CRO].

As generalists, they have three main areas of focus, the first being cost management. The second is attracting and retaining key employees, and the third, structuring successful benefits programs.

These plan sponsors are also still grappling with the 403(b) regulations that came out a few years back, so they recognize they have additional responsibility and oversight, but they don’t know what to do. If you look at the statistics, in terms of adviser support in the small not-for-profit space: In private K –12 institutions, for example, only a quarter are working with an adviser today, and, as the size of these nonprofit institutions get smaller, the coverage is even less.

PA: How can advisers and plan providers such as TIAA CREF help them with these challenges?

Lewis: The institutions first look to us, asking what tools and assistance we can provide. We guide them as much as we can, whether it’s plan design or outsourcing of services. Then we try to partner them with an adviser, who can provide great assistance in putting best practices in place, particularly with regulations and fiduciary oversight.

PA: Many say that the ultimate measure of success is the income replacement ratio, and I’m wondering if you can compare your results with small plans to that with the larger plans.

Lewis: We would agree with you, that the right measure of ultimate success is income replacement in retirement. We’ve done a lot in the last few years in enhancing our plan reporting and plan analytic capabilities, and, through that work, we now have the ability to drill into the details of the income replacement ratios of each participant in every plan, whether it be a small institution or a large institution. That data is critically important to use when we have our one-on-one advice sessions. Helping a participant understand what sort of path he is on in terms of income replacement is a critical data piece to help that conversation.

Then, at the plan level, we help the sponsor gauge whether its plan menu and other elements are working well together. By using this plan outcome assessment tool, we’ve learned that, on average, nonprofit institutions are on track to replace greater than 90% of their income in retirement. We look at that as defining great success.