[Editor’s note: This post has been corrected to reflect that the first target-date fund was introduced in 1993, not 2003.]
“After 40 years of the 401k system, for some, it is now the biggest asset they have,” Kevin Morris, Chief Marketing Officer for Principal Retirement & Income Solutions, said at the 2021 NAPA 401(k) Summit in Las Vegas.
So now what? It was the focus of a Monday afternoon workshop titled “Out” Takes: Riding the Decumulation Wave, which emphasized the value of including guaranteed lifetime income solutions in retirement plans.
The shift from accumulation to decumulation is here, and moderator (provocateur) Patrick McKiernan, CPFA, Senior Vice President with RBC Plan Resource Group, noted that 60% of plan sponsors are now considering offering lifetime income solutions.
“There wasn’t much interest in target-date funds when they were first introduced but look what happened with them,” McKiernan said. “Interest and awareness of guaranteed lifetime income in retirement plans is developing the same way.”
Poll Question
[totalpoll id=”38906″]Calling it a “blind spot” for sponsors and advisors alike, they’re nonetheless increasingly realizing its need, and advisors should want to be included in the discussion rather than leaving it to competitors.
Principal’s Morris noted the need for lifetime income is in part due to the complexity of the decumulation phase.
“They might have saved diligently, have $500,000 in their account, and it must last for 30 years in retirement (tied in with health care and Social Security),” Morris explained. “They’ve flown below the industry’s radar because they’ve maybe contributed $10,000 a year, but now they have to figure out for themselves what to do with it all.”
Like target-date funds and auto-features, lifetime income will eventually dominate industry discussion, predicted Kathleen Kelly, AIFA, CRPS, Managing Partner with Compass Financial Partners.
“It’s the next frontier,” Kelly said, “But adopting a lifetime income solution is not a question to drop on clients, and say ‘that’s it.’ We first go through the plan document to look at every distribution option that’s offered. It’s a marathon, and we spend a lot of time in philosophical discussions with a committee, and then pull the distribution levers that match. It’s really a decision around designing the plan to be cradle to grave.”
Emphasizing moderator McKiernan’s earlier point, Nick Nefouse, CFA, Managing Director at BlackRock, asked for a show of hands.
“How many people in the audience use target-date funds?” he said. ” In 15 years, I’ll come back, and just as many hands will be raised about lifetime income. The reasons are generational demographics, government regulation, and the number of available products.”
Noting the time lag from a new product’s conception through its development to its release, Nefouse said the first target-date fund was introduced in 1993 based on a paper in 1969.
“We’re asking people to create a paycheck for themselves for 30 years,” Morris added, reiterating its complexity. “It’s a Pythagorean theorem for them, and we need to provide as much help as an industry as possible. We have to be better at that.”
Kelly concluded with a practical argument for lifetime income.
“You insure your car, you insure your house, and now you’re insuring against outliving your assets in retirement,” she said, “but people hear the A-word (annuity), which is still an issue.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
Annuities appear to be a purposely complicated investment option. And that’s well reported. 401k’s aren’t complicated. IRA’s aren’t complicated. Until annuities follow suit theirs a reason to distrust them.