A full 40% of retirees express concerns about outliving retirement assets, prompting some plan fiduciaries to take a holistic look at their investment lineup and solutions to hedge against longevity risk, new research from Cerulli Associates finds.
“Future retiree cohorts, who are less likely to have accrued DB plan benefits, are more likely to benefit from the longevity hedging benefits of an annuity allocation.”
Shawn, O’Brien
For many, concerns regarding decumulation and income planning are especially acute, mainly due to rising healthcare expenses—45% of retirees consistently cite healthcare costs as their top stressor.
“The importance of planning for healthcare costs in retirement cannot be understated and advisors, both in plan and out of plan, should account for medical expenses within the holistic, long-term financial strategies they construct for their clients,” Shawn, O’Brien, Cerulli senior analyst, said in a statement.
Also, as plan sponsors continue to favor defined contribution (DC) plans over defined benefit (DB) plans, ownership of longevity risk has gradually shifted from the employer to the participant.
“Retirement savers will increasingly assume the risk of outliving their income-producing assets in retirement,” O’Brien added. “Future retiree cohorts, who are less likely to have accrued DB plan benefits, are more likely to benefit from the longevity hedging benefits of an annuity allocation.”
Increased industry attention has been paid to annuity products with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019. As broader discussions of retirement income in the DC market occurs, the benefits these products provide may offer a viable solution for retirement investors.
Cerulli suggested that advisors in a managed account are well poised to help participants navigate decisions related to annuitization and maintains in-plan annuities are best implemented as a component of a professionally managed solution, such as a target-date fund or managed account, rather than as a standalone option on a plan’s core menu.
“While incorporating annuitization options within target-date funds can potentially make these products more effective retirement income solutions, annuitization decisions are decidedly complex and should take into account the investor’s risk tolerance, liquidity requirements, and investable asset balance, among other factors,” O’ Brien concluded.
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.
