In the Near Future

Art by Núria Tamarit

Retirement plan advisers should familiarize themselves with the various approaches to retirement income, says Bob Melia, executive director of the Institutional Retirement Income Council (IRIC). “Certain advisers are making this a centerpiece of their practice, or a value-add,” Melia says.

“As retirement income becomes more important to plan sponsors, advisers on top of their game in terms of best practices are more likely to win new business when plans go out to bid for new advisers,” he says.

Indeed, according to the 2019 Lifetime Income Solutions Survey by Willis Towers Watson, 30% of employers say they have adopted one or more lifetime income solutions, up from 23% in 2016. Additionally, 60% say they would consider offering their employees lifetime income solutions in the future.

“Our clients are asking about retirement income, but it isn’t a topic of discussion every quarter,” says Martin Schmidt, a principal with MAS Advisors LLC. To date, MAS Advisors’ clients are gingerly approaching the retirement income dilemma by offering managed accounts, education and planning tools about retirement income and, occasionally, an out-of-plan annuity solution, Schmidt says.

Melia says pending pieces of legislation, specifically the Retirement Enhancement and Savings Act (RESA) and the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which promote retirement income, are driving this interest. “These pieces of legislation would give sponsors a straightforward safe harbor to offer guaranteed income products, provide for portability and require recordkeepers to issue statements for participants at least once a year that would show what their balance would equate to each year if it were annuitized,” he says.

“There are three major gaps in the retirement system: the coverage gap, the savings gap and the income gap, the latter of which is complex,” says Christine Stokes, head of DCIO [defined contribution investment only] strategy at Nuveen. “The retirement industry, including legislators, has been focused on the first two gaps, but we haven’t spent a lot of time addressing the income gap in retirement.”

Stokes does not foresee sponsors embracing retirement income solutions en masse for a while. In the interim, she suggests that advisers consider “incremental plan design changes such as making sure the IPS [investment policy statement] allows for systematic withdrawals from the plan in retirement as opposed to a lump-sum distribution.”

Doug McIntosh, vice president of investments at Prudential Retirement, says he thinks the time has come for “advisers to be knowledgeable and experienced about income options” and that, certainly, retirement income solutions should be included in financial wellness programs. In fact, he says, at the annual meeting of Prudential’s top advisers, they are educated about retirement income options.

Right now, there are three main approaches to retirement income, McIntosh says: best efforts, fixed annuities and guaranteed withdrawal. The best efforts include target payout funds, bond ladders and customized liability-driven investing (LDI) solutions. “Thoughtful asset management professionals and advisers are creating careful allocations, but there are no guarantees associated with them,” he says.

The fixed annuities are either immediate or deferred, and these provide guaranteed retirement income for the rest of the purchaser’s life; they can include spousal benefits in the event of the owner’s death; a set, guaranteed number of years of payments; and cash refund options, McIntosh says.

The guaranteed withdrawals are a hybrid of the first two and allow the owner to retain control over the underlying assets, he says.

According to Stokes, already some target-date funds (TDFs) incorporate annuities as a person retires, but “these are geared to plans with $1 billion or more of assets,” she says.

McIntosh notes that plan participants are thirsting for guaranteed income solutions.