Professional advice is essential for 401(k) participants seeking to adopt a retirement income solution that is tailored to their unique personal and financial situations, according to a new paper published this week by Denver-based recordkeeper Empower.
A confluence of factors has historically made the adoption of a retirement income plan difficult for American workers. Complex products and employer fiduciary concerns have been barriers to greater adoption, argues Empower in the paper, “Retirement income: A modern approach driven by advice.”
The Empower paper says the landscape may now be at a tipping point, and the road to greater use of retirement income options may soon be on a path for increased growth; but that must be driven by advice.
“As a leading retirement provider, we are taking workplace savings a step further by coaching and helping individuals convert their lifetime savings into a stream of income in retirement,” said Tina Wilson, Chief Product Officer at Empower. “It’s not a product problem, it’s an engagement problem. We are here to partner with millions of American workers to ensure they develop a successful strategy that is tailored for their individual needs and produces the best outcomes.”
Retirement income solutions that embed three core pillars—personalization, a holistic view of an individual’s personal and financial situation, and advice—are critical to driving new adoption and providing retirees with a more secure retirement income stream. According to the new paper, retirement income solutions should be:
• Personalized: Everyone’s income and spending needs are different. There is not a one-size-fits all solution. Individuals have unique preferences, needs, and wants. They also have unique socioeconomic backgrounds and health outlooks. The key is to tailor retirement income solutions based on a detailed picture of what a retiree needs and wants.
• Holistic: Understanding an individual’s full financial picture is critical to determining how much retirement income they may need. That means evaluating all household assets and labilities — including those held by a spouse or partner.
• Advice-driven: Advice from a financial professional is especially important in helping employees figure out if they need guaranteed income, how much they may need, what products to invest in, and which account types (pre- or post-tax) to withdraw money from to maximize income and minimize taxes—all complex tasks. In the end, advice minimizes the risk of employees paying for guarantees they may never use.
Wilson pointed to Empower research showing the difference that advice can make. When individuals receive professional advice, they tend to save 22% more than they would in a target date fund. During periods of market volatility, those individuals making use of a retirement managed account show strong resilience, with 99.5% of survey respondents maintaining their managed account.
Empower contends that Americans living longer in retirement, demographic shifts altering retirement, and a growing lack of trust in the viability of Social Security are all factors that may lead to a greater embrace of retirement income products.
At the same time, approximately 60% of plan sponsors say they will likely focus more on helping participants convert their plan account balances into income. Plan offerings, they say, should seek to meet the retirement income needs of participants leaving their assets in the plan.
Advisors and consultants also agree, with more than 80% of advisors and consultants believing a defined contribution (DC) plan should offer services that support the retirement income needs of plan participants. In addition, legislation—specifically the SECURE 2.0 Act of 2022—is chipping away at fiduciary concerns by creating a safe harbor provision for retirement plans offering guaranteed income options.
“In a decade, we’ve seen historic market conditions created by the Great Recession, a pandemic, and now, historically high inflation rates,” said Wilson. “Retirement plan participants know they need comprehensive retirement income solutions. We know they need the sort of help that can address risks, speak to their unique preferences and situations, and then advise on the right path forward.”
Learn more about the study here.
SEE ALSO:
• Despite Big Concerns, Plan Sponsors Know They Need Lifetime Income Options
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.