Ready to Focus on Income?

An emerging theme in the retirement plan industry has been the need to help plan participants convert their balance to a steady income stream in retirement. Yet, only half, 53.8%, of employers offer some type of income-oriented product or distribution service, according to the 2018 PLANSPONSOR Defined Contribution (DC) Survey.

Among those employers trying to tackle the challenge, the most common approach is to permit retirees to take systematic withdrawals (44.5%). This requires participants to know how much to withdraw and at what intervals, but it could be useful for those managing multiple sources of money. In-plan professional managed account services that generate monthly retirement income are offered by 27.1% of plan sponsors.

On the product side, in-plan managed payout funds that generate cash flow but lack guarantees are offered in 10.1% of plans. In terms of annuity options, 9.9% of plans offer in-plan insurance products that guarantee monthly income at retirement, and 5.4% offer an out-of-plan annuity purchase/bidding service.
Is there an appetite for these products that help guarantee a “paycheck” in retirement, and are advisers knowledgeable enough about annuities to recommend them to sponsors and participants?

A recent survey of 200 advisers from DPL Financial Partners, a firm that bills itself as a commission-free insurance network for retirement plan and wealth management fiduciaries, shows quite a divergence among advisers on this matter. Very roughly speaking, about half of firms appear to be plugged in to the “decumulation challenge” and actively support their individual clients by advising them about spend-down strategies.

Seventy-nine percent of advisers said “predictable income” is more important to their retirement-focused clients than is “asset growth.” Similarly, 70% of advisers said these clients “value the certainty of not running out of money” over “achieving a certain retirement lifestyle.”

Somewhat surprisingly, only 14% of advisers said their individual clients strongly like or somewhat like annuities, while more than one-quarter (27%) said they “aren’t sure” what their clients think.

“Retirement savers are left with inaccurate biases about annuities,” says David Lau, founder and CEO of DPL Financial Partners in Louisville, Kentucky. These biases, along with individuals’ lack of knowledge, can result in lack of adoption on plan menus.

According to the survey, only 52% of advisers look to plan funding for their clients’ essential projected expenses differently than they do for those individuals’ discretionary expenses. Further, the majority of advisers reported generating retirement income for their clients through a bucketing strategy or through advising them on safe withdrawal rates.

“Eighty-four percent of advisers are aware that annuities can generate income more efficiently than traditional fixed-income investing can,” Lau says. “If advisers could take one action based on these survey results, Lau says, it could be to ensure that clients understand just how diverse the annuity product set actually is.”