We often hear the phrase about plans of mice and men going astray. Well, they do. Often. Let’s see if our industry can finally help keep the plans on track.
Certainly Uncertain
I have been in the financial industry for a quarter century. I have seen the markets rise and fall and rise again. In fact, I have advised through the Black Swan events of 2001, 2008, and 2020 (although some do not agree that this one was a Black Swan).
What I learned over the last 25 years is that no financial plan anyone has ever executed ends the way it was originally laid out. That doesn’t mean that goals are not necessarily reached, or objectives remain unattained. In fact, almost every stat ever shown illustrates that not only are you immensely more likely to achieve your financial goals if you lay out a plan, but you are also more than likely to be emotionally better off with a plan.
Now why would that be? Why does a plan make about 83% of people that engage in the process simply feel better? I would postulate that the reason is pretty vanilla. You are tackling uncertainty when you plan.
For decades, the financial industry believed that the “safe” withdrawal rate for retirees was 4%. However, many experts, including the gentleman that proposed the concept back in the early ’90s, have argued that the rule should be adjusted if markets vary too far from the norm. Recently, some have even reversed that idea and said it is OK to plan on 4% again.
So much for certainty. What to do in a world where we might need to consider renaming Black Swans into simply Swans?
The warning about adjusting the withdrawal rate seems prescient with many experts recommending that new retirees decrease their withdrawal rate to less than 4% in response to market conditions and high inflation. Big downturns lead to certainty being replaced with panic and could lead to financial ruin. In fact, relying on a 4% rule could have led to many retirees facing financial ruin or a drastically reduced lifestyle after recent market downturns in 2001, 2008, 2020, and now.
We Can Be More Certain
One of the problems that has historically led to many investors making economically fatal errors during downturns and even during the duration of their investing lives is the lack of guarantees in withdrawals. Due to the very nature of uncertainty inherent in the markets, inflation, economy, and any financial plan, I would argue that workplace retirement plans must at least consider solutions for guaranteed lifetime income.
“In recent years we have seen the emergence of a new category of modern in-plan annuity solutions that can provide guaranteed lifetime income regardless of market conditions…”
LeafHouse CEO Todd Kading
In recent years we have seen the emergence of a new category of modern in-plan annuity solutions that can provide guaranteed lifetime income regardless of market conditions and shield retirees from the stress of rolling dice on how much to withdraw to ensure their retirement assets will last through a 30- to 40-year stretch.
There are a few ways that this type of income guarantee can be assimilated into a retirement plan when in-plan income is deemed appropriate for participants. One way is to incorporate the solution into a target date or asset allocation fund. This provides total portfolio management for the participant based either on age or risk tolerance with both concepts combined with a potential guaranteed income need. The pro here is appropriate allocation and guarantees. The con is that there is no personalization beyond those basic inputs.
Coupling in-plan income guarantees with personalized managed accounts can provide a level of personalized advice and guidance that a standard rule-of-thumb cannot offer. It’s a modern approach to the age-old problem of creating an income stream that cannot be outlived.
With proper application, a personalized portfolio can determine the potential guaranteed income needs of an individual based on multiple data points, including age, income, savings rate, matching contributions, existing balances, location, social security, etc.
In addition, the proper use of technology can help determine the actual amount that should be protected versus that amount which can take on more risk. Also, do not overlook the importance of the savings advice that can come with a personalized portfolio delivered via a tech enabled platform.
Why Am I So Certain?
In the past, annuities were viewed as very inflexible vehicles. New types of in-plan annuities offer a degree of flexibility that were not previously common. The payments are not fixed and irrevocable. Many offer flexibility from the beginning; with some you can pause and even withdraw account value without surrender charges. Obviously, every offering is a bit different and should be thoroughly researched by a professional.
The passage of the SECURE Act of 2019 established safe harbor protections for retirement plan fiduciaries to decide to adopt in-plan income features for plan participants. This has led to some plan sponsors and some well-recognized professional fiduciaries becoming comfortable taking on the liability of choosing such options.
These types of investments used to be stand-alone and required quite a bit of input and understanding from plan participants. Now these solutions can be delivered in a personalized fashion with full fiduciary oversight, considering the specific needs of each individual.
While we live in a world of uncertainty, there are some things we can do to help provide a little bit of comfort to those that would like to have a plan that doesn’t wildly shift what income they can count on in retirement. We now have firmer regulatory footing. The technology is here to make it more personalized.
There is product innovation that solves for many of the past impediments to annuity utilization in ERISA plans. This is a trifecta that I believe will help us stop U.S. savers and retirees from going astray. As for the mice, I have no idea what to do for them.
LeafHouse is an experienced, national discretionary investment manager and consultant. LeafHouse specializes in creating investment solutions for the retirement plan industry including: investment fiduciary services, manufacturing investment vehicles, managed account programs and enterprise technology solutions.
LeafHouse is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about LeafHouse including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. Past performance is not indicative of future results.
SEE ALSO:
• Agenda of LeafHouse Retirement Event Focused on Embracing Change
• Managed Accounts Can’t Work for Defaulted 401(k) Participants
• Guaranteed Lifetime Income Solutions May Grow Retirement Spending Power
Todd Kading is CEO of Austin, Texas-based LeafHouse Financial and investGrade. As the founder of both firms, he oversaw the growth of LeafHouse from a start-up retirement plan advisory firm to the nation-leading third-party fiduciary in the retirement plan space. Kading and his team launched investGrade in 2020 with the goal of democratizing retirement plan data for the betterment of all the stakeholders of the industry.
