“To feel confident in their retirement, participants tend to need to know a little bit about investing, and a little bit about the laws that affect retirement,” Meghan Jacobson began Thursday at the NAPA 401(k) Cyber Summit.
J.P. Morgan Asset Management’s Head of U.S. Insights Programs moderated an afternoon discussion titled “Out” Takes: The Outcomes for Retirement Income,” featuring Rob Scheinerman, CEO of AIG Retirement Services and Katherine Roy, J.P. Morgan Asset Management’s Chief Retirement Strategist.
“Most participants that we talked to don’t even know that the laws changed last year on December 20, 2019,” Jacobson said by way of setup. “That was when the SECURE Act was signed into law.”
Noting that J.P. Morgan surveyed the plan sponsor community, they found that most sponsors—about half—thought of their defined contribution plans as both as a savings and income-generating vehicle.
“A similar study by Aon found that offering retirement income options was one of the top four drivers of success for plan sponsors,” she added. “As advisors and consultants, we really think that you’ll play a key role in educating your clients and prospects around the importance of their options.”
Beginning with Roy, Jacobson asked why it’s so hard to turn a lifetime of savings into a paycheck for life.
“Being your own personal pension manager is truly overwhelming,” Roy responded. “We’ve done a tremendous amount of research on plan participants, and it shows that they really struggle with four big, really overwhelming questions.”
The first is how long their money will last.
“It’s very difficult when dealing with an unknown time horizon and life expectancy, and as Americans, we tend to significantly underestimate even an average life expectancy.”
The second is how much they can spend each year and how will it change over time. The third is what will happen if they need to access their funds for something other than regular expenses.
The fourth is the hardest, according to Roy, which is the amount of risk they should take and how—especially in this environment—income can be generated in a low-interest-rate world.
“We also know that there is tremendous power around behavioral finance concepts like loss aversion, and retirees constrain their spending and struggle with how much wealth they should draw down to support their lifestyle,” she explained. “The 401k system was built with this whole idea of consumption-smoothing, and people have a hard time, but the reality is that they have a hard time consuming their capital.”
Decumulation was mentioned, a word Roy argued we’ve all grown to love or hate. It’s complicated, and she claimed the simplifying rules don’t work by pointing to the 4% rule as an example.
“Yes, it will keep you from running out of money, but it also has a one-in-five chance that the participant might end up with five times the amount they started with. For most participants, that’s a failed strategy, and not an efficient use of their balance to support their lifestyle spending needs. I think we can do better.”
Annuity angst
Jacobson said insurance can help with many of the challenges Roy described, but for the general public, the word annuity has “a bit of a reputation.”
Turning to AIG’s Scheinerman, she asked how negative perceptions of annuities can be overcome.
“I think of annuities a little bit like I think of my teenager; maligned and misunderstood, Scheinerman joked. “There have been a lot of bad discussions and frustrations with annuities, and they can be very complicated and confusing.”
Yet thinking about them in the right perspective, the consuming public “actually kind of like what an annuity is, we just don’t like the way it’s framed in most discussions.”
He mentioned “beloved products,” like Social Security, which at its core is an annuity, as well as pension plans.
“Neither may last, so having a solution in place to provide income is really important,” Scheinerman emphasized. “If you have a set and persistent expense, you want to have a set and persistent income stream. As Katherine mentioned, we don’t want to be our own pension managers, but with a couple of simple building blocks, we can actually get there, and we can have solutions that we build on our own.”
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.
