Several new products aimed at providing retirees with ways to turn their 401(k) savings into income have come to market recently, a trend that will surely continue, according to Jennifer DeLong, Senior Vice President and Managing Director, and Head of Defined Contribution at AllianceBernstein. Advisors need to begin educating themselves on these tools and strategies to serve their clients and, ultimately, participants, she said.
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How to address retirement income within defined contribution plans is an area where plan sponsors do need help, DeLong said. “Plan sponsors of all sizes generally need help with that because the area still is fairly new, even though the industry has been talking about it for a decade or more,” she said.
Retirement plan participants want simple, flexible income solutions, according to DeLong said, but there’s a psychological component to handing over your life savings to buy an annuity. “What we know from the participants that we work with, and also in our own surveys, is that people don’t like to lose control of their savings,” she said.
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Plan sponsors are starting to recognize the benefits of offering guaranteed income solutions that give retirees the flexibility they want, she added. “Many are thinking about how to shift their plans from being not just a retirement savings plan, but really an overall retirement income plan.”
Even before the SECURE Act created a safe harbor for plan sponsors to offer annuities in their plans, sponsors of all sizes were looking for ways to help participants address the income conundrum, she said.
Much of the interest AllianceBernstein has seen has come from very large plans, DeLong said, but “generally, when things start in the larger plans, eventually there will be additional solutions that come to market that then become available to plans of all sizes.”
Plan Design Considerations
The best income solution for a plan will depend on how the plan is designed. Sponsors have to decide if they want to offer a solution within the plan or out of it, how it should address income certainty, or whether it should be incorporated into the plan’s default options.
“We are seeing more plans of various sizes shifting toward … keeping their participants in the plan. If they’re looking to provide a solution that not only helps the participants with the saving phase, but also the creation of retirement income stream, keeping participants in the plan is one reason why a plan sponsor may want to have an in-plan solution.”
She added that many income solutions don’t come with guarantees, and “really, the only way to truly eliminate longevity risk and market risk is by using a guaranteed solution or an annuity.” Allowing systematic withdrawals over the course of retirement, income funds, managed accounts and even some target-date funds could be used to create retirement income without guarantees, DeLong said.
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Most participants will use the default option, DeLong said, so sponsors who are committed to helping participants create retirement income need to consider participant behavior. DeLong is a proponent of incorporating income solutions into default options to help reframe retirement savings as future income, especially for younger participants.
“We’ve spent all these years helping people think about saving the largest amount they possibly can by time they retire,” she said. “How do you now translate those savings into what that means in terms of a real stream of income?”
DeLong suggests that investment committees take up the income solution question and consider what’s most appropriate for their plan. Even if the conclusion is that offering a retirement income solution isn’t the right action, they should “document that and demonstrate that they’ve gone through the process from a plan governance perspective.”
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Danielle Andrus works as an editor for The Financial Planning Association® (FPA®). Over the past 15 years, she has worked in various capacities, including writing and editing. Andrus has worked for several notable publications and outlets and spent more than seven years as the executive managing editor at ALM Media, publisher of Investment Advisor magazine and ThinkAdvisor.com. Before that, she was online editor for Summit Professional Networks, where she oversaw newsletter development for four magazines, including Benefits Selling, Senior Market Advisor, Boomer Market Advisor, and Bank Advisor.
